®«tlt«^0 of iErottomtra 



FOURTH EDITION 



iiilla 



^i-^^^i 




Class //XV//1X 
Boolc- 



//^'6 



C0P}Tig]itl^°- 



COPYRIGHT DEPOSm 



Outlines of Economics 



A SYLLABUS FOR INTRODUCTORY STUDY 



BY 
HERBERT ELMER MILLS, Ph. D. 



Fourth Edition 



POUGHKEEPSIE, NEW YORK 

NINETEEN HUNDRED 

SEVENTEEN 



/?/r 



Copyright, 1917. 
Herbert Elmer Mills. 



/ 

OCT -6 1917 



Lansing-Broas Printing Co., Inc., 
231 Union St., Poughkeepsie, N. Y. 



©G!.A476403 



>/> 



These Outlines, prepared in 1906, revised in 1909 and 
1913, are designed to serve as a basis for a first year's 
work in Economics for college students. They are in no 
sense a substitute for text-book, but are rather a guide to 
a simultaneous use of several of the best treatises. The 
required readings are in the following: Taussig's Prin- 
ciples of Economics (second edition), Marshall's Eco- 
nomics of Industry, Seager's Principles of Economics, 
Seligman's Principles of Economics (seventh edition), 
Bullock's Selected Readings in Economics, Marshall, 
Wright and Field's Materials for the Study of Elemen- 
tary Economics, and Holdsworth's Money and Banking. 



Department of Economics, 

VASSAR COLLEGE, 

September, 1917. 



Outlines of Economics 



CHAPTER I. 
INTRODUCTORY. 

1. Definition, Scope and Scientific Character of Economics. 

a. Definitions used at different periods of economic 
study reveal the change in its character. 

Adam Smith, 1776 : Inquiry into the Nature and Causes 
of the Wealth of Nations. 

Nassau Wm. Senior, 1836 : "The science which treats 
of the nature, the production and the distribution of 
wealth." 

Luigi Cossa, 1877 : "The science of the social ordering 
of wealth." 

Seager, 1913 : "Economics is the social science which 
treats of that portion of human activity which is con- 
cerned with earning a living." 

h. " 'Money,' is the center around which economic 
science clusters because in this world of ours it is the one 
convenient means of measuring human motive on a large 
scale." 

c. Not all subjects of study are sciences. The charac- 
teristics of the sciences are ability to classify facts or 
phenomena in orderly arrangement ; and to establish re- 
lations of sequence or cause among them. From these 
follow some possibility of prediction. Sciences have 
these characteristics in very different degrees. 

In spite of the apparent freedom of the individual will, 
human actions are capable of scientific study, and, when 



6 Introductory 

masses are considered, of comparatively accurate pre- 
diction. The social sciences are incomplete and in many 
respects very inexact; but, because it possesses a more 
accurate measure of the relative strength of human mo- 
tives, Economics is more exact than the others. 

Economics aims to discover truth and must be dis- 
tinguished as a science from statesmanship, philanthropy, 
social reform, which, as arts, endeavor, on the basis of 
the truth discovered by Economics and other sciences, to 
accompHsh results. 

Required reading. Seligman, Principles, §§ 3 and 14; and 
Marshall, Economics of Industry, Bk. I., chs. 1 and 3. 

Suggested reading. Gide, Principles of Political Economy, 2d 
ed., pp. 1-7; Cossa, Introduction, pp. 40-65; Keynes, Scope and 
Method, chs. 1-3; Cairnes, Political Economy ; its Character and 
Logical Method, pp. 25-42; Fetter, Economic Principles, Vol. I., 
ch. 1. 

2. Economic Law and Method. 

Economic laws are statements "that certain action may 
be expected under certain conditions from the members 
of a social group" in lines "of conduct in which the 
strength of the motives chiefly concerned can be meas- 
ured by a money price." 

In Economics as in other sciences the adjective normal 
is used to describe that which is in accord with scientific 
law. 

Like most other sciences Economics uses both induc- 
tion and deduction in discovering its laws. 

Required reading. Marshall, Economics of Industry, Bk. I., 
ch. 4 and Appendix A; Seligman, Principles, §§ 10, 11; Seager, 
Principles, §§ 35, 36r 

Suggested reading. Cossa, Introduction, pp. 67-92 ; Gide, Prin- 
ciples, Bk. I., ch. 4; Keynes, Scope and Method, chs. 6, 7; Cairnes, 
Political Economy; its Character and Logical Method, Lecture 
III. 

3. Relation of Economics to other Subjects of Study. 

Economics and the other social sciences are closely 

related and mutually dependent. Even when we en- 



Intraductory 7 

deavor to decide the appropriate course of social action 
in lines in which the motives are mainly economic and 
in which accordingly economic laws will be our chief 
guide, we get assistance from History, Psychology, So- 
ciology, Law, Politics, Statistics, Finance and other 
studies which deal with man individually or socially. But 
Economics having its own special field of investigation 
should be discriminated from all these other subjects. 

Required reading. Seligman, Principles, §§ 12, 13; Seager, 
Principles, § 2. 

Suggested reading. Cossa, Introduction, pp. 23-39; Keynes, 
Scope and Method, chs. 4, 9, 10; Marshall, Principles, (5th ed). 
Appendix C. ; Dictionaries and Encyclopsedias for definition and 
scope of the various social sciences. 



4. Importance of the Economic Factor in Social Development. 
"Economic Interpretation of History." 

It is asserted by some that since "the existence of man 
depends upon his ability to sustain himself, the economic 
life is therefore the fundamental condition of all life." 
Marx says : "The economic structure of society is the real 
basis on which the juridical and political superstructure 
is raised and to which definite forms of social thought 
correspond ; in short, the mode of production determines 
the character of the social, political and intellectual life 
generally." This "economic interpretation of history does 
not exhaust the possibilities of life and progress ; it 
does not explain all the niceties of human development ; 
but it emphasizes the forces which have hitherto been so 
largely instrumental in the rise and fall, in the prosperity 
and decadence, in the glory and failure, in the weal and 
woe of nations and peoples. It is a relative rather than 
an absolute explanation." — SeHgman. 

Suggested reading. Seligman, Economic Interpretation of 
History; Ghent, Mass and Class, ch. 1; Marshall, Princi- 
ples, pp. 1-4; Marshall, Economics of Industry, pp. 1-4; Spargo, 
Socialism, ch. 4. 



8 Introductory 

5. Value of the Study of Economics. 
The study of Economics gives better understanding of 
history, deeper insight into our present social organiza- 
tion, guiding principles in connection with nearly all 
social activities, deeper sympathy and interest in connec- 
tion with some profound social and ethical problems, in- 
telligence and discretion with which to temper our feel- 
ings in the presence of social evils. It also provides a 
mental discipline surpassed by few if any studies, since 
it encourages precision, accuracy, discrimination, clear- 
ness of thought and expression. Many of its problems 
are of such difficulty that they require most intense appli- 
cation. A continued chain of reasoning is frequently 
necessary as in a mathematical demonstration ; but since 
the forces and factors that must be borne in mind are very 
numerous, comprehension and grasp in an unusual degree 
are necessary. It gives a training in that kind of thinking 
which is necessary for success in every day life and action. 

Suggested reading. Andrews, Institutes of Economics, § 16 ; 
Laughlin, Study of Political Economy, chs. 2, 3; Cossa, Intro- 
duction, pp. 93-110; Patten, American Economic Association 
Publications, 5:473-486. Marshall, Principles, (5th ed.) Bk. I., 
ch. IV., §§ 5, 6 ; Marshall, Plea for the Creation of a Curriculum 
in Economics, 



CHAPTER II. 

NATURE AND DEVELOPMENT OF ECONOMIC 
SOCIETY. 

1. Organic Nature of Society. 
A society is not an accidental aggregation of unrelated 
individuals but is organic in character. It has the power 
of growth from within ; it manifests "differentiation" or 
specialization of function, and "integration" or that close 
inter-dependence and inter-relation of parts which creates 
an essential unity. Social evolution is in accord with the 
general evolutionary tendency from the homogeneous, or 
generalized, to the heterogeneous, or specialized. An 
efficient cause of progress has been that "struggle for 
existence" which results in the "natural selection" of 
those methods, institutions, structures, groups, "which 
are best fitted to derive benefit from their environment." 
Social evolution is not merely biological but largely 
psychical and increasingly self-directed. Whether this 
evolution results in progress or degeneracy depends upon 
whether or not it helps create a social environment favor- 
able to that higher personaHty which is the goal of human 
existence. In the field of economic structure and activity 
the highly organic nature of modern society is pre-emi- 
nently apparent. 

Required reading. Marshall, Economics of Industry, Bk. IV., 
ch. 8. 

Suggested reading. Fairbanks, Introduction to Sociology, pp. 
31-44; Small and Vincent, Introduction to the Study of So- 
ciety, pp. 87-96; Ritchie, Principles of State Interference, pp. 
3-51 ; Darwinism and Politics, pp. 1-83; McKechnie, The State 
and the Individual, pp. 1-26. 



10 Development of Economic Society 

2. Characteristics of Modern Industrial Society. 

Prominent in modern industry are separation of occu- 
pations ; division of labor; machine process; great di- 
versity in required industrial skill ; opportunity for ex- 
tensive wage employment of unskilled laborers including 
women and children ; large industrial units ; trusts ; local 
specialization of industries ; rapidity and cheapness of 
communication and transportation ; wide markets ; sep- 
aration of industrial functions ; the wages system ; enor- 
mous employment of capital; profit as the test of suc- 
cess ; money ; the credit system with its elaborate ma- 
chinery ; possibility of economic maladjustment ; crises 
and depressions. Economic freedom, competition and 
recognition of the private property right are general 
characteristics of modern society that exert profound in- 
fluence on all its economic and social relations and give 
rise to many of the more special characteristics men- 
tioned above. 

These characteristics are not the result of conscious 
action or catastrophy, but of a long process of evolution. 

3. Evolution of Private Property. 

From communal ownership is developed individual 
ownership of weapons, animals, slaves, chattels, land. 
The origin of individual ownership is often force and 
fraud; but the development and persistence of the sys- 
tem of private property rights, as distinguished from 
possession, has its real explanation in the fact that it en- 
couraged industry, thrift and accumulation of wealth 
which aided the social groups possessing them to survive. 
The occupation, natural rights, labor and legal theories 
of private property have been replaced by the social util- 
ity theory. The private property right in its various as- 
pects is, then, Hmited by the principle of social utility. 

Required reading. Seligman, Principles, ch. 9. 



Development of Economic Society 11 

Suggested reading. Hadley, Hcowomicj, pp. 26-34; O'ldt, Prin- 
ciples, pp. 428-437; Palgrave, Dictionary of Political Economy 
article Property. 

4. Evolution of Freedom. 
Freedom in tiie sense of positive capacity for self-deter- 
mined action was unknown among savages. Subjection 
to nature, to superstition, to the strong and to custom 
was accompanied by extermination of captives. Slavery, 
serfdom and the wage system, each introduced because of 
its relative economic superiority, were steps in advance. 
There is now a considerable degree of freedom as of 
marriage, movement, occupation, association, consump- 
tion, production, contract, trade. Liberty is not an end 
but a means to that higher development of individuality 
which is the only real freedom. Liberty except as based 
on equality and a sense of social responsibility is dan- 
gerous ; and hence w^e must by social control restrict 
liberty to secure freedom. Positive individual freedom is 
a social product. 

Required reading. Seligman, Principles, ch. 11. 

Suggested reading. Hadley, Hco»omJc.y, §§ 29-44, 78-82; Webb, 
Industrial Democracy, pp. 844-850; Problems of Modern Indus- 
try, ch. 10; Ritchie, Principles of State Interference, pp. 83-151; 
McKechnie, The State and the Individual, pp. 305-321 ; Ritchie, 
Natural Rights, pp. 135-147. 

5. Evolution of Competition. 
Competition, a form of freedom, has undergone devel- 
opment. At first largely a rivalry between groups it be- 
comes more and more extensive within the group. Un- 
der modern industry competition has tended constantly 
to replace custom as a determinent of price. While more 
necessary, it is also more pregnant with danger. It is 
the cause of progress, selecting those who can best serve 
society, leading to accumulation of wealth, protecting the 
consumer, encouraging energy. It is found between com- 
modities, between individuals, between markets, between 
classes, between countries. It involves dangers and with- 



12 Development of Economic Society 

out initial equality of competitors may not realize its ben- 
efits. It is limited and controlled by custom, co-opera- 
tion, monopoly or government regulation. 

Required reading. Seligman, Principles, ch. 10. 

Suggested reading. Marshall, Principles, (Sth ed.) Appendix 
A ; Economics of Industry, Bk. I., ch. 2 ; Hadley, Economics, 
§§ 76, 77, 87, 97; Hadley, Freedom and Responsibility, ch. 5; Ely, 
Evolution of Industrial Society, pp. 123-163; Palgrave, Diction- 
ary of Political Economy two articles on Competition. 

6. Evolution of Industrial Organization. 

a. There have been various explanations of economic 
development ; as barter, money, credit economies ; or 
from status to contract ; or from a militant to an indus- 
trial society ; or through hunting, pastoral, agricultural, 
commercial, industrial stages ; or stone, bronze, iron, 
steel ages. Although these are all suggestive and par- 
tially true, they are inadequate. From the economic 
standpoint there are "three great stages known respec- 
tively as the self-sufficing economy, the trade or commer- 
cial economy, and the capitalist or industrial economy." 
(Seligman). 

h. Including under "industrial organization" the rela- 
tion of producer to the consumer, of the different classes 
and occupations of workers to each other, of the differ- 
ent classes of workers to capital and to risks of sale, of 
hand work to capital, we find constant development of 
more complex relations. 

c. Under the "family system" "production was car- 
ried on within the family, by the family, for the family." 
There was no market ; no wage ; no machinery ; little 
division of labor ; little capital ; little separation of indus- 
trial function. The productive unit was self-sufficing. 
Transition begins in the hiring of itinerant or more per- 
manent workmen. This system is exemplified more or 
less fully in the slave plantation of early Rome, in the 



Development of Economic Society 13 

mediaeval manor, in the frontier farm, in the Southern 
plantation. 

d. Under the "guild" or handicraft system the pro- 
ducer of a good produces it for others ; he owns tools and 
material ; he works by hand ; he works at a specific trade ; 
he may employ others ; but they are "help," on their way 
to independence and a status like his own ; he assumes 
the risk of finding a market and deals directly with the 
consumers of his products. In the Middle Ages such pro- 
ducers formed associations or guilds in each trade to pro- 
mote the welfare of that trade. They came to regulate 
conditions of work and the character of goods and ac- 
quired large civic and political power. 

e. Under the domestic system the work is done by 
craftsmen as under the guild system, but distributed and 
ordered by a capitalist who takes the risks of sale and 
often furnishes the materials. The typical producer un- 
der the domestic system did not own raw material or fin- 
ished product and tended to rent the more expensive 
tools. This capitalist is not a hand-worker but an em- 
ployer or entrepreneur. The market is a comparatively 
wade one. Means of transportation, of exchange and of 
handling capital are improved. In the textiles industries 
this system was dominant in England from the sixteenth 
to the eighteenth century. 

/. Under the factory system there is an enormous in- 
crease in capital in .the form of buildings, machinery, 
power, materials. Not only materials but machinery and 
place of work are owned or are controlled by employer. 
To utilize power, machines must be in one place so that 
many workers are in one factory. The worker is divorced 
from ownership of the means of production, and his 
work is narrowly specialized. There is differentiation of 
industrial function. The market is greatly widened by 
enormously improved means of transportation. Ex- 



14 Development of Economic Society- 

change and credit are highly organized. This system be- 
gd.n in England at the end of the eighteenth century as a 
result of great inventions in the textile manufacture. 

g. The efificient cause of the development of the later 
systems has been the superiority of each over the preced- 
ing in producing goods cheaply. In some lines of work 
since such superiority has not existed, the development 
did not take place and we have survivals of older methods. 

Required reading. Bullock, Selected Readings in Bconomics, 
ch. 5; and either Seager, Prificiples, ch. 1; or Seligman, Princi- 
ples, chs. 5, 6. 

Suggested reading. There is a large amount of literature upon 
the different phases of industry but many of these books are either 
too voluminous, too detailed, or too neglectful of essential dis- 
tinctions to be of use in this course. Ashley, English Economic 
History, passim as Vol. II., pp. 219-222; Biicher, Industrial Evo- 
lution, chs. 1-4; Hobson, Evolution of Modern Capitalism, chs. 
2, 3; Toynbee, The Industrial Revolution, pp. 178-202; Veblen, 
Theory of Business Enterprise, chs. 2, 3. 

7. Development of Economic Thought. 

a. The economic thought of each age is a reflex of its 
economic life and economic problems. 

h. The military point of view, the prevalence of slav- 
ery and the consequent contempt for labor limited the 
■economic thinking of the ancient world to questions of 
property right, division of labor, usury and money. 

c. The predominant religious character of the age and 
the development of industry and commerce by free labor 
made the mediaeval thinking center around the ethics of 
price, interest and money. 

d. The revival of commerce after the Crusades, 
changes of price due to money from the New World, de- 
l)asement of coinage and particularly the growth of cen- 
tralized states needing revenues, standing armies and 
navies, and owning colonies, aroused much practical po- 
litico-economic thinking. The resulting Mercantile Sys- 
tem emphasized the necessity to a nation's welfare of a 



Development of Economic Society 15 

large stock of money gained from a favorable balance of 
trade ; of manufactures ; of shipping ; of large popula- 
tion ; and of colonies — all as essentials of a successful 
national policy. To secure these a detailed system of 
state regulation was developed. 

e. The philosophical and political thought of the 
eighteenth century and the errors of the mercantihst 
thinking led to a revolt. The Physiocrats emphasized 
food rather than money as wealth ; agriculture as the pro- 
ductive industry since it alone was said to give a net 
product ; natural rights ; natural law ; and freedom of 
all economic activity from governmental control. Lais- 
sez-faire. Quesnay, Turgot. 

/. Adam Smith was largely influenced by the Physio- 
crats, expressing the cosmopolitan point of view and pro- 
claiming natural liberty as a means to general welfare. 
He finds in all industry the source of wealth ; and his 
theory of distribution is a reflex of contemporary eco- 
nomic changes and conditions. He showed the social 
value of economic self-interest. His Wealth of Nations 
(1776) is the foundation of modern economic thinking. 

g. Production for large markets, the necessity of 
profit, the difi^erentiation of industrial classes, the increase 
of capital brought to the front problems of value and 
distribution. These were treated by the English school 
led by Ricardo, Malthus, Senior and summed up by J. S. 
Mill. Wealth, competition, non-interference were em- 
phasized. 

h. The unfortunate social results of the new indus- 
trial system and the dehumanized character of the con- 
temporary economic theory led to revolts on ethical 
grounds by Ruskin and Carlyle and on theoretical 
grounds by the socialists like Karl Marx. 

i. The historical school was a reaction from the de- 
ductive a priori method of the English school, advocating 



16 Development of Economic Society 

inductive study and insisting upon the relativity of eco- 
nomic theory. 

;'. The Austrian school of the present returns to the 
deductive method, but has a new psychological basis in 
its theory of utility. 

k. Contemporary British and American economists, 
feeling the influence of all these lines of thought, using 
historical and deductive methods, accepting the theory 
of marginal utility, show, as Seligman says, "how and 
why social progress and the growth of capital are inti- 
mately bound up with the advance of the mass of 
workers." 

'Required reading. Seligman, Principles, ch. 8. 

Suggested reading. Andrews, Institutes, §§ 5-15; Marshall, 
Principles, Bk. I., ch. 4; Ingram, History of Political Economy; 
Haney, History of Economic Thought; Cossa, Introduction, His- 
torical Part ; Seager, Economics, a lecture delivered at Columbia 
University. 



WANTS AND THEIR SATISFACTION : DEMAND. 

CHAPTER HI. 

1. The Nature and Economic Significance of Wants. 
Human wants vary with race, climate, stage of civili- 
zation, individual development physically, intellectually, 
aesthetically, morally, religiously. They are capable of 
indefinite expansion ; limited in intensity ; competitive ; 
complementary ; largely matters of habit and fashion. 
The want is the cause of economic activity. Wants cause 
activities, but activities cause new wants. 

Required reading. Marshall, Economics of Industry, Bk. III., 
ch. 2; Seager, Principles, §§ 38, 41; Bullock, Selected Readings 
in Economics, pp. 236-245. 

Suggested reading. Smart, Introduction to the Theory of 
Value, chs. 1-4. 

2. Definitions Relating to Value. 
Utility is capacity to satisfy a want. Value is power in 
exchange or an estimate of relative utility. Price is value 
expressed in money. Demand means the quantity that 
will be taken at a given price. Supply means the quantity 
that will be furnished at a given price. 

Required reading. Seager, Principles, § 29. 

3. Wealth. 
a. In defining wealth we hold to common usage and 
discriminate between wealth and welfare even though 
etymologically and ethically such distinction be unfor- 
tunate. Wealth (as used in Economics) does not neces- 
sarily mean abundance. Those goods having utility, 
which are external to the individual, and limited in 
amount constitute wealth. Wealth is that which has 
value. Wealth may be private or public (—social or col- 



18 Wants and Their Satisfaction : Demand 

lective). Some valuable sources or conditions of wealth 
are not wealth. Although from a logical and psycholog- 
ical standpoint there is no difference between the utility 
of a service and the utility of material wealth, services 
are not included in wealth. 

b. The forms of wealth at any time and in any coun- 
try are determined by and reflect the prevailing civiliza- 
tion. A large amount of wealth at present consists of 
very durable but very indirect means of satisfying wants. 

c. Wealth is essential to individual and social prog- 
ress ; and the study of Economics is a study of that which 
conditions science, art and all higher life. Wealth does 
not necessarily advance welfare or civilization. It is the 
nature of man, his tastes and interests which determine 
what things are wealth ; but these in turn are affected by 
his choice and use of wealth. 

Required reading. Seligman, Principles, §§ 4, 5; Marshall, 
Economics of Industry, Bk. II., chs. 1, 2; Taussig, Principles, 
pp. 3-8; Chicago Materials, pp. 41-45. 

Suggested reading. Clark, Philosophy of Wealth, ch. 1 ; Clay, 
Economics for the General Reader, chs. 23, 24, 25. 

4. The Nature of Demand as Based Upon Diminishing Utility. 

a. "The utilities of additional units of any good to 
any consumer diminish naturally as his supply of units of 
that good increases." (Seager). 

h. Consequently, although he might use much more 
of the articles if it were a free good, he ceases his pur- 
chases at the point where, in his estimation, the utility of 
the last addition to his stock is only equal to its cost. The 
utility of this last portion acquired is the marginal utility 
of the commodity to him. 

c. It follows that, as the price is lowered, the purchase 
of additional units will be made since their utilities will 
successively equal the falHng price; and, as the price 
rises, purchases will be diminished, since this rising price 



Wants and Their Satisfaction : Demand 19 

will successively be greater than the estimate of the utiHty 
of the units previously bought. Hence results the Law of 
Demand, that, other conditions remaining the same, the 
amount demanded increases with a fall and decreases 
with a rise in price. The larger the supply, the lower the 
price at which it can be sold. 

d. Demand schedules of individuals are different, be- 
cause the marginal utility of money varies to different 
persons and because of varying intensity of desire. 

e. "Value is not merely the expression of marginal 
utility ; it is the expression of social marginal utility." 
(Seligman). "Value in industrial society is the result of 
social valuation. It is not so much man's estimate as so- 
ciety's estimate of marginal utility." (Seager). 

/. "Most goods are not simple utilities but bvmdles of 
utilities," (Seager) and "value is the expression of the 
social marginal increments of utility which are bundled 
together or united in anything, and each of which is mar- 
ginal to a different class." (Seligman). 

Required reading. Taussig, Principles, ch. 9; or Seager, 
Principles, §§ 39, 51-58; or Marshall, Ecomonics of Industry, Bk. 
III., ch. 3; or Seligman, Principles, ch. 12. Also Chicago Mater- 
ials, pp. 20-27. 

Suggested reading. Pierson, Principles, pp. 54-61 ; Carver, 
Distribution, pp. 1-27; Clark, Distribution, ch. 16; Smart, Intro- 
duction to Theory of Value, chs. 6, 7. 

5. Elasticity of Demand. 

Elasticity of demand refers to the degree in which de- 
mand responds to changes in price. It varies greatly ac- 
cording to the nature of the article and the income of the 
purchaser. 

Required reading. Marshall, Economics of Industry, Bk. III., 
ch. 4; Seager, Principles, § 42; Seligman, Principles, § 102. 



20 Wants and Their Satisfaction : Demand 

6. Comparison of Utilities. 
"If a person has a thing which he can put to several 
uses, he will distribute it between these uses in such a way 
that it has the same marginal utility in all. For if it had 
a greater marginal utility in one use than another, he 
would gain by taking away some of it from the second 
use and applying it to the first." (Marshall). Similarly 
one's total expenditure of money or effort tends to be so 
directed that marginal utilities in different lines will be 
equal. 

"The utility of future goods is less to the normal con- 
sumer than the utility of present goods of like kind and 
quality by an amount varying directly with the degree of 
futurity." (Seager). 

Required reading. Marshall, Economics of Industry, Bk. III., 
ch. 5 ; Seager, Principles, § 40. 



CHAPTER IV. 
PRODUCTION OF WEALTH : SUPPLY. 

A. General Considerations. 

a. Production is the creation of utility ; the utility- 
created may be of form, of place, or of time. Consump- 
tion is the destruction of utility. Production involves 
sacrifice and time. 

h. The factors of production are nature, labor, capital. 
Since production is a social process, the efficiency of these 
factors will depend largely upon the system of organiza- 
tion that brings them together ; and upon due apprecia- 
tion of the significance of the human factor. 

Required reading. Seligman, Principles, ch. 18; Seager, Prin- 
ciples, §§ 30, 31. 

Suggested reading. Marshall, Principles, Bk. IV., ch. 1 ; Mill, 
Principles, Bk. I., chs. 1, 2, 3; Clark, Philosophy of Wealth, ch. 
2; Nicholson, Principles, Bk. I., ch. 2; Elements, pp. 32-47. 

B. Nature. 

1. Influence of Nature Upon Man's Economic Life. 

Required reading. Bullock, Selected Readings in Economics, 
pp. 1-22; Seligman, Principles, §§ 16-19; Chicago Materials, pp. 
58-61. 

2. Exhaustion of Natural Wealth. 

a. Some natural resources may be permanently ex- 
hausted. Some natural resources are incapable of per- 
manent exhaustion. Some natural resources replace 
themselves more or less completely by growth. 

b. Minerals cannot be increased. Necessity of econ- 
omy in utilization. Progress of science makes possible 
utilization of low grade ores, which practically means an 
increase in quantity. 



22 Production of Wealth : Supply 

c. Fisheries in some cases seem inexhaustible. In 
other cases much may be done to overcome tendency to 
exhaustion. 

d. Forests. American tendencies. Need of scientific 
forestry. 

e. Limited area of desirable building land. Methods 
of overcoming this limit. Modern building methods. 
Rapid transit. 

/. Fertility of the soil for agricultural uses may be in- 
creased by cultivation ; soil mixture ; irrigation ; drain- 
ing and clearing; fertilization; artificial climatic con- 
ditions. 

Required reading. Seligman, Principles, §§ 132-135; Chicago 
Materials, pp. 77-102. 

3. The Law of Diminishing Returns. 

a. At any particular time and in any particular stage 
of soil exhaustion and scientific knowledge, successive 
equal applications of effort to a given area of land will, 
after a certain point is reached, yield decreasing additions 
to the volume of product. 

h. Because of this fact of diminishing returns, there 
is a point beyond which a further expenditure of effort or 
money will be greater than the resulting returns to that 
added outlay. This is the margin of cultivation. In the 
case of some land this point is reached only after much 
outlay (many "doses" of capital and labor, as Professor 
Marshall says) ; other land is so poor that no cultivation 
pays ; still other land is on the margin of cultivation 
since its most ordinary cultivation ("one dose") is just 
paid for by the product. 

c. The law of diminishing returns is frequently errone- 
ously thought to refer to exhaustion of the soil. 

d. This law is frequently erroneously thought to re- 
fer to successive periods of time. 



Production of Wealth : Supply 23 

Required reading. Marshall, Economics of Industry, Bk. IV., 
chs. 2, 3; or Seager, Principles, §§ 71-75; Chicago Materials, pp. 
73-77. 

Suggested reading. Gide, Principles, pp. 86-103; Mill, Princi- 
ples, Bk. I., ch. 12; Kropotkin, Fields, Factories and Work- 
shops, ch. 3-5. 



C. Labor. 

1. General Considerations Regarding Labor. 

a. Ordinarily every satisfaction of a want involves 
the performance of labor on the part of some one. Labor 
is exertion with some other end in view than merely the 
pleasure involved in the exertion. Productive labor was 
formerly held to be only that which produced utility in 
durable form. All labor may be regarded as productive 
which accomplishes the end in view ; that is, which aids 
in the satisfaction of a want. Individual acquisition is 
not necessarily social production. 

b. Labor of different individuals varies greatly in its 
predominant characteristics — some being largely mus- 
cular, some manual, some inventive, some supervisory, 
some protective, etc. 

c. Work, which, within certain limits may be pleasure, 
education and wholesome discipline, becomes, if contin- 
ued, irksome toil, intellectually stunting, morally debas- 
ing and economically less productive. 

d. The labor force of a country depends upon its (1) 
Quantity ; (2) Quality. 

Required reading. Taussig, Principles, Vol. I., pp. 8-29; Chi- 
cago Materials, pp. 104-108. 

Suggested reading. Clark, Philosophy of Wealth, ch. 2. 

2. Amount of the Labor Force. 

a. The labor force of a country depends directly upon 
the population. Increase of population depends upon 



24 Production of Wealth : Supply 

(1) The birth rate. This is influenced by the mar- 
riage rate which is affected by conditions of prosperity. 
This latter influence is due to the private property right, 
and to parental rather than social responsibility for main- 
tenance. The number of births per marriage varies 
greatly with race, nationality, social and economic condi- 
tion. In recent years it has decreased in the United States, 
England and some other countries, partly because of an 
increasing standard of comfort and partly because of cer- 
tain social tendencies. 

(2) The death rate. This is dependent upon many 
considerations — sanitary, medical, social, industrial and 
governmental. Other conditions remaining constant, the 
death rate tends to decrease with increasing prosperity. 

(3) Migration. The balance between emigration and 
immigration is an important influence upon the popula- 
tion of certain countries. In the United States immigra- 
tion responds quickly to prosperity. 

(4) Prosperity tends to increase the rate of increase of 
population in the United States since it accelerates the 
birth rate and immigration, and retards the death rate. 

(5) It is socially better to maintain a certain increase 
of population by a low birth rate and a low death rate 
than by a high birth rate and a high death rate. 

b. The labor force of a country is affected by the dis- 
tribution of population by age periods. The number of 
efficient laborers will be smaller in a country in which 
there is an undue proportion of young children. 

c. The labor force of a country is affected by the dis- 
tribution of the population between productive and non- 
productive classes. In the latter are paupers, insane, 
tramps, idle rich and other drones. It is also decreased if 
there are too many relatively in certain professions or oc- 
cupations, so that they are not fully employed. Certain 
countries suffer because the class of priests is relatively 
too large, being recruited by non-economic causes. 



Production of Wealth : Supply 25 

d. The amount of labor depends upon the number of 
days in the year and hours in the day devoted to work. 
Many holidays for religious or other reasons and short 
working days seriously decrease productiveness in cer- 
tain countries. However, a lack of holidays and rest days 
and an excessive duration of the work day exert an un- 
fortunate influence on the efficiency of the laborer and de- 
crease production. 

e. An increase in the population may exert an influ- 
ence on production less than proportionate if it involves 
pressure on subsistence ; or more than proportionate if 
it allows co-operation and organization to a greater ex- 
tent than were previously possible. 

/. Note;. Thomas Robert Malthus in the first edition 
of his Essay on Population (1798) maintained against 
Condorcet, Godwin and others, that great progress in hu- 
man happiness was impossible since population tended to 
increase geometrically, while food increased only arith- 
metically, with the result of pressure upon subsistence, 
except so far as population was limited by other positive 
checks, such as vice, war, famine. The admission in a 
second edition (1803), of the possibility of the preventive 
check of "moral restraint" made more correct his theory 
of population, but ruined his argument against the per- 
fectionists. Against Malthus' theory it is urged that 
there are physiological, social and economic hindrances 
which prevent the birth rate attaining its maximum ; and 
that progress in science and the arts reveals almost un- 
limited possibiHties of improvement in raising and work- 
ing up food supply and raw material. It is also claimed 
an increasing population is relatively more efficient be- 
cause of better organization. 

Required reading. Bullock, Selected Readings in Economics, 
pp. 275-286, being Extracts from Malthus' Essay ; or Chicago 
Materials, pp. 111-123; and either Taussig, Principles, ch. 52, 53; 
or Seager, Principles, §§ 168-173 and Seligman, Principles, ch. 4. 



26 Production of Wealth : Supply 

Suggested reading. Marshall, Principles, Bk. IV., ch. 4; Mill, 
Principles, Bk. I., chs. 2, 3, 10; Nicholson, Principles, Bk. I., chs. 
5, 11; Walker, Political Economy, pp. 301-314; George, Progress 
and Poverty, pp. 81-124. 

3. Efficiency of the Individual Laborer. 

a. The laborer is as a rule more efficient as he is a well 
developed man. Muscular strength, nervous energy, in- 
telligence, taste, character affect his productivity, al- 
though their relative importance in different occupations 
varies greatly. Nervous energy, intelligence, character 
(in the sense of honesty, industry, accuracy, resourceful- 
ness, reliability) are in every line of work important. In 
some lines muscular strength has become relatively less 
necessary. One of the serious indictments against our 
present industry is that it blunts the artistic sense ; but 
there is a growing perception of the need for taste in 
many lines of manufacture. 

b. The qualities which make one an efficient laborer 
depend largely upon the Standard of Living and respond 
more or less closely to its changes. The Standard of 
Living is largely dependent upon income. The quantity, 
kinds and combinations of food ; its preparation and 
cooking ; housing accommodations, reasonable leisure, 
proper recreations and amusements ; time and means for 
education ; avoidance of improper expenditure for stimu- 
lants and narcotics, etc., react sooner or later on efficiency. 

c. Hope, freedom, security and incentive affect pro- 
ductiveness. Hence the system of industrial remunera- 
tion whether slavery, time wages, piece wages, profit 
sharing, co-operation, premium plan, economic inde- 
pendence is significant. The social system and the gov- 
ernment have their effect, as have systems of land tenure 
and the property right. 

d. Occupation and industrial conditions affect general 
vigor, nervous energy, intellectual and artistic develop- 
ment, moral character. This is particularly important in 



Production of Wealth : Supply 27 

the case of children, since they are in an undeveloped 
formative condition. Even from the merely economic 
point of view, child labor is objectionable as a great draft 
on future efficiency. Compulsory education and factory 
laws are aids to efficiency. 

e. Modern city life has its effect on the productive 
efficiency of the laborer because of housing congestion, 
lack of air and play grounds, undue nervous stimulus, 
spread of contagion, etc. The strongest physique, ner- 
vous energy and character of the country tend toward 
the city and there tend to be exhausted. Such evil tend- 
encies may be largely overcome by social effort. 

/. Efficiency is increased by education whether of 
common school, high or college, whether Hberal, manual, 
trade or technical. Much education comes from other 
agencies than the school, as the home, the factory or 
shop, the systematic apprenticeship. 

g. The economic efficiency of a worker is largely de- 
termined by the economic, intellectual, artistic, political,, 
moral standards and institutions of the society in which 
he lives and especially of the social class to which he be- 
longs. Man is a social product. 

h. An individual's efficiency depends largely upon his 
finding that place for which he is most fit. Anything 
which hinders such adjustments, as social and industrial 
grades, or inequality of opportunity interferes with social 
efficiency. So far as a greater degree of economic equal- 
ity is naturally secured, it increases equality of oppor- 
tunity and hence efficiency. 

i. Economic progress, like social progress generally, 
has depended upon the elimination of the inefficient and 
the selection of the efficient. Although humanitarian ef- 
forts to prevent such elimination may and sometimes do 
tend to, interfere with progress in economic efficiency, we 
need not conclude that such philanthropy is necessarily 



28 Production of Wealth : Supply 

uneconomic. Efficiency depends partly upon the acquire- 
ment of much race tradition, knowledge, skill. Those 
naturally prone to elimination but preserved by philan- 
thropy may by such acquirement become efficient. Fur- 
ther the quahties of character necessary for efficiency in 
a society are not entirely the same as those for a Robin- 
son Crusoe. Philanthropy by cultivating social traits 
may indirectly promote efficiency. 

y. Although those quahties which produce efficiency 
are partly the result of non-economic causes, still in a 
large degree economic efficiency is a direct response to 
the demand for it is, as shown in wages, salary and profits. 

Required reading. Marshall, Economics of Industry, Bk. IV., 
chs. 5, 6; Seager, Principles, §§ 76-78; Chicago Materials, pp. 
123-134, 137, 140-144. 

Suggested reading. Mill, Principles, Bk. I., ch. 7, Bk. II., chs. 
5-9 ; Hadley, Economics, §§ 22-27, 362-368. 

D. Capital. 

1. Definitions and Distinctions. 

A piece of wealth is desirable because of the utility that 
comes from it. There is an income of benefit. Common 
usage does not apply this term to the utilities coming 
from consumption goods ; but does apply it to the utility 
coming from wealth used in production of further wealth ; 
and also extends the term to any addition to wealth 
whether coming from use of land, from accumulated 
wealth used in production, or from human effort in form 
of wages, salaries or profits. While the income is in real- 
ity one of utility or utility-producing wealth, it is com- 
monly thought of and expressed in terms of money. We 
think of income as a stream or flow — not as a store. 

One may sell for a lump sum his right to receive in- 
definitely an income from a piece of wealth, that is, its 
income may be capitalized as may any other income. 
Thinking, then, of such estimated lump-sum or capitalized 



Production of Wealth : Supply 29 

values of incomes of utility, we may say with Seligman 
that "the totaHty of capital is equivalent to the totality 
of wealth." But usage limits the word capital from the 
individual point of view to that "wealth which he devotes 
to acquiring an income in the form of money." — (Mar- 
shall). Further the usage of economic discussion defines 
capital from the social point of view as "the products of 
past industry used as aids to further production," 
(Seager), excluding land. While the particular pieces of 
capital may be called capital goods, the business man 
thinks of capital as "the complex of capital goods used 
in connection with each branch of production measured in 
money." — (Seager). 

Capital is classified from point of view of durability as 
fixed or circulating; from point of view of mobility as 
specialized or free. 

Required reading. At least three of the following : Marshall, 
Economics of Industry, Bk. II., ch. 4; Seager, Principles, §§ 70, 
78, 79; Seligman, Principles, §§ 6, 137; Taussig, Principles, ch. 
5 ; §§1, 2, 8, 9, 10. 

Suggested reading. Mill, Principles, Bk. I., chs. 4, 6; Palgrave, 
Dictionary, article Capital. 

2. Function and Growth of Capital. 

a. Although indirect and involving delay, capitalistic 
production is advantageous since it enables man to em- 
ploy his strength more efifectively or to use natural forces 
otherwise useless. Capital assumes varied forms. 

b. The growth of capital depends upon ability to save, 
or surplus of income above expenditure ; and zvillingness 
to save which is encouraged by family affection, political 
and economic security, a high rate of interest, intelligence, 
and morality. Since a future utility is regarded as less 
desirable than a present one, saving is largely dependent 
upon a rate of interest high enough to overcome the su- 
perior attractiveness of a present good. Some saving, 
however, is regardless of the rate of interest, having in 



30 Production of Wealth : Supply 

view a sum rather than an income, while in other cases 
the determination to secure a certain income results in 
greater saving with a low than a high rate of interest. 

c. The accumulation of capital is the result of saving 
and investment. This process is much facilitated by mod- 
ern financial methods and institutions, such as banks, 
savings banks, insurance companies, building and loan 
associations, etc., and by the representation of owner- 
ship by transferable stocks and bonds. 

d. Economic (and hence social) progress has been 
largely dependent upon the accumulation of capital, since 
the amount of wealth production is largely determined by 
the quantity and form of capital. But wealth produc- 
tion is even more dependent upon the skill and training 
of the members of society. Social progress depends upon 
due proportion between saving and wise consumption. 

e. There is a direct response of the supply of capital 
to the demand for it as revealed by changes in the rate 
of interest. 

Required reading. Taussig, Principles, ch. S, §§ 2)-7, and ch. 
39; or the following three references: Seager, Principles, §§ 
78-84; Seligman, Principles, §§ 137-140, 167; Marshall, Eco- 
nomics of Industry, Bk. IV., ch. 7. Also Chicago Materials, pp. 
157-170. 

E. Industrial Organization. 

1. Production a Social Process. 

Production is not individual but a complicated social 
affair involving much "differentiation" of occupation, of 
process, of function, of locality. This differentiation in- 
volves interdependence of the parts of the industrial or- 
ganization. While this enormously increases the efficiency 
of production, it involves serious maladjustments and 
makes an injury to a part the concern of all. 

Required reading. Marshall, Economics of Industry, Bk. IV., 
ch. 8. 



Production of Wealth : Supply 31 

2, Division of Labor: Co-operation. 

a. The productive efficiency of a people is much in- 
creased by the co-operative efforts of workers. Co-opera- 
tion even without differentiation of work often promotes 
efficiency, but the economic gain is most apparent when 
each instead of being a Jack-of-all-trades becomes a 
specialist. 

b. The cause is found in the economic advantage of a 
lowering of cost of production. This is due to (1) in- 
creased dexterity ; (2) shortening of apprenticeship ; (3) 
saving of time in changing work ; (4) stimulus to inven- 
tion; (5) economy of ability; (6) economy of material; 
(7) economy of tools and machinery. 

c. Against the immediate economic gain are alleged 
social disadvantages some of which are in the long run 
causes of economic loss. Such are physical injury, mo- 
notony leading to intellectual deterioration, dependence 
because of the narrowing of the field of employment, ex- 
cessive employment of women and children, destruction 
of the aesthetic and constructive faculties. These are in 
part preventable by protective labor legislation, shorten- 
ing of the hours of work and an increase of educational 
and cultural opportunities outside of working hours. 

d. The appHcation of the principle of division of 
labor depends directly upon the size of the market, which 
is determined by the growth of the population and the 
increase of transportation facilities. 

e. In modern industry there is a tendency, as a par- 
ticular process comes to be mechanical and monotonous, 
for a machine to take it over. Frequently these separate 
machines are combined or replaced by a perfecting ma- 
chine so that instead of many specialized laborers there 
are a few high grade laborers controlling and tending a 
complicated piece of mechanism. 



32 Production of Wealth : Supply 

Required reading, a and- either b or c. 

a. Chicago Materials, pp. 17-19, 55-57; 181, 188, 189, 199- 

204; or Bullock, Selected Readings in Economics, 
ch. 10. 

b. Taussig, Principles, ch. 3. 

c. Marshall, Economics of Industry, Bk. IV., ch. 9 ; Seager, 

Principles, §§ 85-89; Seligman, Principles, §§ 127-129. 

Suggested reading. Smith, Wealth of Nations, Bk. I., chs. 1, 
2, 3; Gide, Principles, pp. 173-182; Mill, Principles, Bk. I., ch. 8; 
Hearn, Plutology, chs. 12, 13; Hobson, Evolution of Modern 
Capitalism, ch. 4, %% 2>-7 ; Plato, Republic, Bk. II., 369-371 ; Com- 
mons, Labor Conditions in Slaughtering and Meat Packing, 
Quar. Jour. Econ., 19 : 1 — Same article in Commons, Trade 
Unionism and Labor Problems, pp. 223-228; see also pp. 324-329; 
Palgrave, Dictionary, article Division of Labor. 

3. Localization and Specialization of Industry. 

a. Not infrequently a considerable proportion of an 
industry is localized in a district, city or town. In some 
cases a large proportion of all the industrial activity of a 
region or city is occupied in one industry. The former is 
called localization of industry and the latter specializa- 
tion of industry. 

b. The original cause of such localization or speciali- 
zation is usually the presence of raw material ; favorable 
soil or climate ; transportation facilities ; sources of 
cheap power ; racial qualities. 

c. When an industry has once established itself, new 
concerns tend to the same place because of its advan- 
tages, such as trade knowledge prevalent there ; a local 
market for skill ; subsidiary trades ; ability to utilize by- 
products ; specialized machinery ; general good trade 
repute. Specialization involves some disadvantages, as 
too exclusive a demand for one kind of labor, severe trade 
depressions, serious labor troubles. 

d. Localization and specialization are limited by size 
of the market and hence have tended to increase with im- 
provement of transportation facilities. 



Production of Wealth : Supply 33 

Required reading. Bullock, Selected Readings in Economics, 
pp. 165-184; Marshall, Economics of Industry, Bk. IV., ch. 10; 
Chicago Materials, pp. 189-197. 

Suggested reading. Hobson, Evolution of Modern Capitalism, 
pp. 24-30, 105-116; Hearn, Plutology, pp. 305-314. 

4. Size of the Business Unit. 

a. Efficiency of production is contingent upon the ad- 
justment of the size of the business unit in each trade to 
its particular needs. The tendency in typical modern in- 
dustries has been toward enormously large estabhsh- 
ments employing thousands of laborers and milHons of 
capital. In many lines of trade and manufacture the small 
establishment still prevails. 

b. Advantages of the large producer : 

(1) On the manufacturing or productive side. Econ- 
omy of fixed capital ; of circulating capital ; of technical 
skill ; of materials. Subsidiary industries may be main- 
tained by large concerns. 

(2) On the commercial side. The large producer 
buys cheaply, gets favorable transportation rates, handles 
freight cheaply, saves in selling expenses and advertising, 
often gets trade through a wide spread reputation. 

(3) On the side of general policy. The large producer 
can study markets, fashions, trade tendencies, develop- 
ment of localities. 

(4) Size itself gives power in competitive struggle. 

c. Advantages of the small producer : 

(1) On the manufacturing side. In some trades a 
small factory has all possible efficiency coming from 
specialized machinery and division of labor. The owner 
can watch all processes carefully and prevent waste of 
labor and material. Subsidiary industries help the small 
producer while trade journals spread knowledge. 

(2) On the commercial side. His disadvantages here 
are partly compensated for by alliance with expert job- 
bing and wholesale houses. In lines in which taste and 



34 Production of Wealth : Supply 

individuality are desired the small producer has, at least, 
an even chance. 

d. The actual result in any line of business depends 
upon the relative importance therein of the above con- 
siderations. Examples will easily suggest themselves. 

Required reading. Either a or & or c. 

a. Taussig, Principles, ch. 4. 

b. Marshall, Economics of Industry, Bk. IV., ch. 11; and 

Seager, Principles, § 93. 

c. Chicago Materials, pp. 45-55. 

Suggested reading. Hobson, Evolution of Modern Capitalism, 
pp. 81-121 ; Mill, Principles, Bk. I., ch. 9, §§ 1, 3, 4; Twelfth Cen- 
sus of the United States, 1900, VII., pp. Ixxii-lxxv. 

5, Business Management. 

a. There is a distinct economic function of manage- 
ment. The entrepreneur or undertaker of business estab- 
Hshes the business ; brings together and organizes labor, 
capital and natural resources ; assumes the risks ; gets 
the profits. Even though he works with his hands and 
owns the capital, the function of management is distinct. 

h. The successful entrepreneur must have knowledge 
of his trade, its materials, processes, machines, market 
tendencies. He must be able to select, organize and con- 
trol labor of all grades without friction. He must have 
financial ability, foresight, caution, decision and energy. 

c. The forms of management are 

(1) Individual ownership. This secures unity of pur- 
pose_and direction; but in typical modern industries one 
individual rarely possesses the varied talents necessary 
for success, frequently lacks capital, and may not care to 
risk all in one line. 

(2) The partnership increases capital and combines 
varied abilities. It sometimes means friction, divided 
policy and indecision. 

(3) The corporation or joint-stock company may be 
defined as "an association of individuals, known as stock- 



Production of Wealth : Supply 35 

holders, who are empowered by legal charter to elect an- 
nually a board of directors, and through it to act as one 
person in the conduct of the specified business." It en- 
sures large capital, continuity of existence, limited lia- 
bility, publicity when desirable, utilization of small capi- 
tals, and diversion of capital into competent hands. There 
is often lack of personal interest on part of managers, 
and stockholders may be defrauded by those in control. 

(4) Co-operation, or managing ownership by workers 
or consumers, means direct personal interest; but lacks 
great managing ability and involves friction and divided 
responsibility. 

(5) Public ownership is another form of management. 
d. Sharp competition is continually eliminating those 

methods of management and persons that have not abil- 
ity, and, on the other hand, bringing needed capital to 
those who show success. There is a response of business 
abihty to the demand for it. 

Required reading. Marshall, Economics of Industry, Bk. IV., 
ch. 12; Seager, Principles, §§ 90-92; Seligman, Principles, § 41; 
Chicago Materials, pp. 204-218. 

Suggested reading. Twelfth Census of the United States, 1900, 
VII., pp. Ixvi-lxviii. 

F. Future of Production. 

The efficiency of wealth production in the future de- 
pends upon the combined influence of all the factors con- 
sidered in this chapter. The law of diminishing returns, 
exhaustion of natural resources and anything that afifects 
unfavorably the efficiency of the worker or the accumula- 
tion of capital, are unfavorable. Increasing efficiency of 
the worker ; growing wealth ; invention ; application of 
science to agriculture, industry and transportation ; more 
efficient organization possible with larger population, etc., 
are favorable to increasing per capita production. 

Required reading. Bullock, Selected Readings in Economics, 
pp. 193-215; Marshall, Economics of Industry, Bk. IV., ch. 13. 



CHAPTER V. 

EXCHANGE. BALANCING OF DEMAND AND 
SUPPLY. VALUE. 

1. Development and Advantage of Exchange. 
Exchange has been a gradual development increasing 
with the change from a self-sufficing to a capitalist econ- 
omy. It has been encouraged and shaped by natural 
transportation routes. Exchange makes it possible "to 
utilize wealth which would remain unused" ; it increases 
utiHty ; it increases productivity by allowing specializa- 
tion ; it generally benefits both parties. 

2. Markets. 

a. Market formerly meant a place of sale. It now 
means those "buyers and sellers who are in such free in- 
tercourse with one another that the prices of the same 
goods tend to equality easily and quickly." (Cournot). 

b. Markets are continually widened by rapid and 
cheap transportation and communication. That a com- 
modity may have a very wide market, it must be large in 
amount, extensively desired, portable, and capable of 
grading and exact description. 

Required reading. Marshall, Economics of Industry, Bk. V., 
ch. 1, ; and either Bullock, Selected Readings in Economics, pp. 
325-340; or Chicago Materials, pp. 340-367. 

3. General Considerations Upon Value. 

a. A prominent central fact in modern economic life 
is exchange of goods. Such exchange is conditioned upon 
a valuation accepted by buyer and seller. How is this 
value determined in the market of the moment? Since 
such values are frequently obviously temporary, how are 
more natural values determined? How are the depar- 



Value 37 

tures of market from normal values to be explained? 
What effect may monopoly have on value ? How are such 
values related to wages, interest, profit and rent? Such 
are fundamentally the problems of value. 

h. Nature does not produce in unlimited quantities the 
commodities we desire. To secure them requires labor or 
sacrifice. To secure greater and greater quantities (which 
to the individual have diminishing utility) requires more 
labor, which becomes irksome. Diminishing pleasure 
costs increasing pain. When the utility is equaled by the 
disutility, one stops effort to secure it. To the individual, 
marginal cost equals marginal utility. 

c. As value is determined by social marginal utility 
(see ch. 3, 4, f) so it is determined by social cost — not in- 
dividual cost. Varying estimates of utility give the indi- 
vidual a surplus of total utility above total cost. This 
surplus does not affect value ; nor does the fact that a 
thing might cost a certain individual more than the social 
cost affect its value. Value is a social problem. 

d. Utility determines value ; cost determines value ; 
but neither alone determines value. "We can not speak 
of marginal utility without implying cost; we can not 
speak of maginal cost without implying utility." (Selig- 
man). 

e. Value being the ratio between the things valued, a 
general rise or fall of values is impossible, but a general 
rise or fall of prices is constantly taking place. 

/. In studying the causes of market value and of nor- 
mal value acute competition is assumed to exist — as it 
usually does in wholesale markets. 

Required reading. One of the following : Td^wss'ig, Principles, 
chs. 8, 9; Seager, Principles, §§ 51-61; Seligman, Principles, ch. 
13; Marshall, Economics of Industry, Bk. III., ch. 6 and Bk. V., 
ch. 2, § 1, ch. 3, § 7. 

Suggested reading. Clark, Philosophy of Wealth, ch. 5 ; Smart, 
Introduction to Theory of Value, chs. 8, 9. 



38 Value 

4. Market Value. Temporary Balancing of Demand and Supply. 

a. Buyers are influenced by the urgency of their needs 
(demand schedules), by the amount of money available 
(marginal utihty of money), by their estimates of the 
course of prices in the immediate future. Sellers are in- 
fluenced by the urgency of their need of money, by the 
amount of their stock, by their estimates of future prices. 

b. If there are one buyer and one seller, there is no 
sale unless buyer's maximum equals seller's minimum. 
If it is higher, then price will be fixed between these lim- 
its according to relative skill in bargaining. 

c. If there are several buyers and one seller, the most 
eager buyer will get the article if he meets the seller's 
minimum ; if there are several units, each may be sold 
separately or a price may be fixed just sufficient to sell all. 

d. If there are several sellers and one buyer, competi- 
tion will enable the buyer to get the article at the mini- 
mum of the most eager seller, or at a price just below the 
minimum of the next most eager seller, or somewhere be- 
tween these two. 

e. The most typical case is that of several buyers and 
several sellers. Here, as in preceding cases, the essential 
fact is not the number of persons who buy and sell (as 
implied in some text books), but the quantities offered 
and taken. Sellers compete as a class with buyers as a 
class, but further each seller competes with other sellers 
and each buyer with other buyers. If the lowest price 
of the most eager seller is higher than the highest price 
of the most eager buyer, there will be no sale. At a price 
which may be called the equilibrium price the same quan- 
tity will be offered and taken, and equilibrium will be es- 
tablished ; for at a higher price more will be offered than 
buyers will take, and competition among sellers will re- 
duce the price, each reduction decreasing amount offered 
and increasing amount taken. Should price fall below 
equilibrium price conditions are reversed. 



Value 39 

/. "Under free competition there can be at a given 
time and place only a single price for the same commod- 
ity." "In case of competition the market price is always 
the one at which the greatest number of exchanges can 
be effected." (Seligman). 

Required reading. One of the following: Taussig, Principles, 
ch. 10; Seager, Principles, §§ 62-68; Marshall, Economics of In- 
dustry, Bk. v., ch. 2; Seligman, Principles, ch. IS; Chicago Ma- 
terials, pp. 374-391. 

Suggested reading. Hobson, Economics of Distnbution, ch. 1 ; 
Smart, Introduction to the Study of Value, chs. 10, 11; Pierson, 
Principles, pp. 72-75. 

5. Normal Value. Balancing of Normal Demand and Normal 
Supply. 

a. Normal value or price "is the price which, apart 
from exceptional conditions, is expected to prevail, and to 
which actual prices seem constantly striving to adjust 
themselves." (Fetter). 

h. Real cost of production consists of the efforts and 
sacrifices necessary to production. The money that must 
be paid to call forth these efforts and sacrifices is the 
money cost or expenses of production. Cost of produc- 
tion means socially necessary cost of re-production. 

c. Expenses of production consisting of prices of ma- 
terials, wages, interest, wear and tear, earnings of man- 
agement, etc., constitute the supply price "required to call 
forth the exertion necessary for producing any given 
amount of a commodity." (Marshall). By the Principle 
of Substitution producers are continually trying to sub- 
stitute a less expensive method of securing certain re- 
sults for that in use. 

d. When the demand price is greater than the cost of 
production, the attempt of sellers to reap resulting profits 
leads to an increased supply which can, however, find a 
market, other things being equal, only at a lower price. 
When price is below cost of production, conditions are 



40 Value 

reversed. In either case price tends to equal marginal 
cost of production. "When we say that price is fixed by 
the cost of production, we really mean that it is fixed at 
the cost of production." (Seligman). 

e. At a given time cost of production is "the marginal 
cost of production ; that is, it is the cost of production of 
those goods which are on the margin of not being pro- 
duced at all, and which would not be produced if the price 
to be got for them were expected to be at all lower." 
(Marshall). 

/. At a given moment, price may differ widely from 
cost of production ; but the longer the forces of supply 
are allowed to work without interruption, the more close- 
ly will price approach cost of production. But in actual 
life equilibrium is rarely attained, since in a progressive 
society cost of production constantly changes. 

g. In general it may be said that both market and nor- 
mal values are determined "by demand and supply, but in 
the case of reproducible goods the permanent equilibrium 
between demand and supply tends to adjust itself to the 
cost of production." 

h. In the case of certain commodities increasing de- 
mand means permanently higher cost of production ; in 
the case of others it means constant cost ; and in the case 
of still others it means lower cost. Normal values are 
correspondingly affected. 

i. "While the normal value is at any given moment at 
the point of maximum cost, it is under a condition of 
progress continually moving in the direction of minimum 
cost." (SeHgman). 

j. Selling value is a capitalization of estimated future 
uses. 



Value 41 

Required reading. Either a or b, and c. 

a. Taussig, Principles, chs. 12, 13, 14. 

b. Marshall, Economics of Industry, Bk. V., chs. 3, 5 ; Selig- 

man, Principles, §§ 103-109, 112-114. 

c. Chicago Materials, pp. 396-407; 417-418 

Suggested reading. Clark, Philosophy of Wealth, chs. 5, 6; 
Hobson, Economics of Distribution, ch. 3; Carver, Distribu- 
tion of Wealth, pp. 25-52; Flux, Economic Principles, ch. 4; 
Pierson, Principles, pp. 61-66. 

6. Influences that Hinder or Complicate Determination of Value. 

a. In studying value competition has been assumed to 
exist. Anything that interferes with competition inter- 
feres with the ordinary determination of value. The fol- 
lowing are the more important causes of such interfer- 
ence : custom ; ignorance ; authoritative regulation. 

b. Large fixed capital. Certain elements of cost 
change proportionately with the quantity of product; 
other elements are more or less independent of output. 
The former may be called prime, the latter supplementary 
costs. Supplementary costs are largely due to fixed capi- 
tal. Since it is often wise to manufacture for some time, 
even if supplementary costs are only partially or even 
not at all covered, the adjustment of price to total cost 
of production may be delayed until the fixed capital is 
adjusted. Also, since fixed capital can not always be 
quickly supplied, price may remain above cost of produc- 
tion until capital is adjusted. There is here no new prin- 
ciple — only delay ; but this condition is one of increas- 
ing practical importance. 

c. Rarely is the supply or demand for an article dis- 
connected from that of other articles. 

(1) Joint demand is a demand for the various factors 
necessary to produce an article. One of these joined fac- 
tors may have its price much raised by a check to its sup- 
ply if it is an essential but relatively small part of a much 
desired commodity, and if the supply of the other factors 
will not be much decreased by a fall in price. 



42 Value 

(2) Composite demand is a demand for an article for 
various uses. The working of the laws of value is in such 
a case sometimes obscure, since a radical change in the 
demand for one use may have but slight effect on the 
total demand. 

(3) Joint supply is the supply of certain articles which 
are inevitably common products of a process. Some of 
these are called by-products and they are of increasing 
practical importance. In such cases the cost is a joint 
cost of the whole and the normal price of all the parts 
together adjusts itself to the joint cost. 

(4) Composite supply is the meeting of a certain want 
by several rival articles that may be substituted for each 
other. A change in the cost of production of one may 
seriously affect values of rival products. 

Required reading. Taussig, Principles, ch. 16; or Marshall, 
Economics of Industry, Bk. V., chs. 4, 6 ; Chicago Materials, pp. 
418-422. 

Suggested reading. Twelfth Census of the United States, X. 
pp. 725-748. 

7. Monopoly Value. 

When monopoly exists, value does not tend to equal 
marginal cost. Value tends to be fixed at that point 
which will give the greatest net returns, having due re- 
gard to the effect of this price upon the volume of sales 
and profit on the unit. 

Required reading. Either a or b. 

a. Taussig, Principles, ch. 15. 

b. Marshall, Economics of Industry, Bk. V., ch. 8, § 2; 

Seager, Principles, §§ 121, 122; Seligman, Principles, 
§ 110. 

8. Speculation. 

a. Speculation is the buying or selling of commodities 

in the expectation that subsequent selling or buying of 

the same will yield a profit other than that which would 

be considered a reward for wholesale or retail handling. 



Value 43 

In one form or another it is a prominent fact in present 
economic life. To it are attributed many evils. 

h. Gambling is economically disadvantageous, be- 
because it discourages industry and social productiveness. 

c. Insurance, on the other hand, encourages industry 
and promotes social welfare. 

d. Nearly all modern business involves speculation, 
since, while goods are in process of production or sale, 
changes in price may result in great gain or loss. The 
manufacturer, the wholesale or retail merchant, the build- 
er, the farmer, are speculators whether they will or not. 
To some extent these risks may be avoided by contracts 
for future delivery. Such arrangements, however, do not 
do away with speculation, but transfer it to a class who 
specialize as speculators. 

e. Such a class to succeed must be skilled forecasters 
of future demand and supply. If they estimate that a 
certain commodity will in the future be lower in price 
than now, all things considered, they sell for future de- 
livery, confident that they will buy for even less. If they 
believe the price will be higher, they buy for future de- 
livery, confident that the future price will yield a profit. 
In each case their action tends to secure a greater uni- 
formity of price over a period than would otherwise be 
found. There results the survival of a class of skilful 
speculators who estimate the course of prices with great 
accuracy. 

/. The motive of such speculators is to make a per- 
sonal gain, and the method is practically a wager. But 
there results a great social advantage. By the action of 
speculators supply tends to be equalized in time and space 
so that prices tend to be steadier. This results in secur- 
ing the greatest possible social utility from such supply. 

g. There seems to be no easy method of distinguish- 
ing between good and bad speculation. Both use the 



44 Value 

same commodities and the same methods. Both use large- 
ly borrowed money. False reports, corners, manipula- 
tion and anything which tends to fix prices artificially 
rather than to ascertain what they naturally tend to be, 
interferes with the equalization of supply over a given 
time, and consequently to result in an economic loss to the 
community. Further, the ease with which the business 
of speculation may be taken up entices many who over- 
estimate their capacity in this direction. That this re- 
sults in economic loss is true, but speculation is, in this 
respect, difi'erent from other businesses only in degree. 
Further, such mistaken speculators are rapidly eliminated 
from business. 

h. It seems clear that reason and experience are 
against attempts to regulate speculation by prohibiting 
the sale of commodities for future dehvery. 

Required reading, a and either b or c. 

a. Bullock, Selected Readings in Economics, pp. 340-353, 

367-386; Chicago Materials, pp. 391-396. 

b. Taussig, Principles, ch. 11. 

c. Seligman, Principles, §§ 153, 154; Seager, Principles, 

§ 110. 

Suggested reading. Hadley, Economics, chap. 4; Emery, 
Speculation on the Stock and Produce Exchanges of the United 
States. 



CHAPTER VI. 
DISTRIBUTION OF WEALTH. 

A. Preliminary Considerations. 

I. The Problem of Distribution. 

"The national dividend is at once the aggregate net 
product of, and the sole source of payment for, all the 
agents of production within the country : ... It 
constitutes the whole of them, and the whole of it is dis- 
tributed among them, and the larger it is, the larger, 
other things being equal, will be the share of each of 
them." These shares are : wages, or the remuneration of 
labor ; interest, or the earnings or product of capital ; 
profits, or the income from business enterprise ; rent, or 
the income that accrues or is paid to owners of natural 
resources for the use of them. How are these deter- 
mined? It is a question of function — not of individuals, 
since the same individual may combine two or three func- 
tions. This problem is of fundamental economic and 
social importance. 

2. All Incomes Paid from Capital Goods but not out of Capital. 

"All but the small part of income which is produced 
immediately before it is consumed comes . . . from 
the products of previous days' industry stored up as capi- 
tal goods." But since a part of the product is constantly 
replacing these capital goods the fund of capital is kept 
intact. 

3. Normal Tendencies Underlie Actual Conditions. 

In actual economic life, especially in modern industrial 
countries, constant changes are taking place which dis- 
turb the equilibrium that competition would tend to es- 
tablish. Population increases as does capital ; skill of 



46 Distribution of Wealth 

labor and efficiency of capital goods improve ; methods 
of agriculture, manufacturers, trade constantly progress ; 
climate is variable ; and consumption is constantly chang- 
ing. Further, competition is far from perfect because of 
monopoly, ignorance, immobility. Consequently changes 
in the shares in the Distribution of the National Divi- 
dend are constant ; but there are working underneath 
these changes tendencies which in an unchanging society 
would result in normal distribution. 

Required reading. Taussig, Principles, ch. 38, § 1 ; Marshall, 
Economics of Industry, Bk. VI., ch. 1, § 1, ch. 2, § 5; Seligman, 
Principles, % 150; Seager, Principles, §§ 95-107; Bullock, Select- 
ed Readings in Economics, pp. 513-532. 

Suggested reading. Smart, Distribution of Wealth, Bk. II., ch. 
1; Smart, Return to Protection, ch. 1; Clark, Distribution of 
Wealth, ch. 1. 

B. Profits. 

1. Business Profits under Competitive Conditions. 

a. Business profits are the returns coming to the own- 
ing manager, entrepreneur, captain of industry, above in- 
terest on his capital, rent of his natural agents and such 
wages as he might receive if employed by another. 

h. In modern industry constant changes are taking 
place. Such changes are increases in population and in 
capital ; improvement in skill of labor and the efficiency 
of capital goods ; better organization of labor and capi- 
tal; changes in habits of consumption; variabiHty in 
climate and season ; and exhaustion of natural resources. 

c. There result changes in prices which make market 
prices higher or lower than the normal prices composed 
of wages and interest. Hence appear, even under sharp- 
ly competitive conditions, entrepreneur's gains or losses. 
Such gains are profits in the strict sense and continue a 
long or short time according as competition can quickly 
or slowly restore normal conditions. 



Distribution of Wealth 47 

d. Profits are partly due to chance ; partly to exploi- 
tation ; but are mainly a reward for risks undergone, for 
foresight in seeing coming industrial changes and for 
skill and abihty in organizing industry. 

Required reading. Either a or b. 

a. Seager, Principles, §§ 108, 109, 111-117. 

b. Taussig, Principles, chs. 49, 50 and Seligman, Principles, 

§§ 151, 152. 

Suggested reading. Carver, Distribution, pp. 268-278; Clark, 
Distribution, chs. 5, 25. 

2. Monopoly Gains. 

a. Normal distribution depends upon the existence of 
competition. Since competition is frequently restricted 
by combination, some prices are determined in accord- 
ance with the law of monopoly value above normal value. 
Hence result monopoly profits. 

b. These monopoly profits, so far as they are due to 
prices higher than those which would prevail without 
monopoly, affect cost of living and diminish the real in- 
comes of other factors of production. 

Required reading. Seager, Principles, §§ 118-120; Seligman, 
Principles, § 155. 

C. Rent. 

1. Definition and Discrimination. 
Rent is the share of income that goes to the owner of 
any natural agent. Bconomic rent, or the real earnings 
of a natural agent, must be distinguished from contract 
rent, or the sum that one pays in return for the right to 
receive the earnings of a natural agent. The term rent 
is frequently extended to the sum paid for the use of other 
things than natural agents. 

2. The Basis of Rent. 
a. There would be no rent were there a superabund- 
ance of best land. There would be no rent if unlimited 
applications of capital and labor to land produced the 
same proportionate return. 



48 Distribution of Wealth 

b. Because of the scarcity of best land and because of 
the fact of diminishing returns, the necessary food and 
raw material demanded by increasing- population can be 
secured only by resort to poorer lands or by less produc- 
tive applications of labor and capital to the best land. 
The effective motive in either case is the higher price of 
the produce of land resulting from increasing demand. 

c. Since all equal units of a crop will have equal value 
in the same market, the price, fixed at the marginal cost 
of production, will yield a surplus on that part of the 
crop raised at relatively greater advantage. This surplus 
arising from superior productivity of land above the ex- 
tensive or intensive margin or cultivation is economic 
rent. 

d. The income of permanent improvements obeys the 
same law as income ascribable to the land itself. 

3. The Relation of Rent to Prices. 

a. Generally speaking, rent is the result of price — not 
price the result of rent. In the case of a crop raised in 
part on actual no-rent land, rent (that is, the disposition 
of the surplus) does not increase price, although this sur- 
plus, being a part of supply, helps fix the price. 

b. "More commonly the marginal land for any par- 
ticular use itself affords a rent because, though marginal 
for the given use, it is above the margin for some other 
use to which it might be applied." (Seager). In such a 
case the marginal rent is an element in price, but the dif- 
ferential rent due to the use of better land for this par- 
ticular purpose does not increase price. 

c. The intensive margin of cultivation is a no-rent 
margin. The price of the commodity thus raised inten- 
sively is not increased by the payment of rent, but is de- 
termined by wages and interest at the margin. Wages 
and interest are necessary to secure the supply of labor 



Distribution of Wealth 49 

and capital. They are therefore necessary elements in 
cost of production. "Rent, however, is wholly a result of 
production," and not a cause. 

4. Rent of Water Power and Mines. 

These rents are determined similarly to that of land. 
In the case of water power the marginal power used must 
yield a return large enough to pay interest on the invest- 
ment of capital necessary for utilization. The rent of 
water-power is constantly limited by the cost of the pos- 
sible substitutes for it. 

In the case of mines the product does not renew itself. 
Hence the marginal mine ought rationally to be one which 
paid not only working expenses but enough to compen- 
sate for exhaustion of the deposit. Practically, on account 
of the speculative nature of most mining, there are no- 
rent mines and "the rent of better mines is measured up 
from them as a no-rent margin." (Seager). 

5. Qualifications of the Law of Rent. 

The rotation of crops complicates but does not con- 
tradict the law of rent. The product of the entire period 
of rotation must be divided among the years to find the 
annual product. The variations of weather and price af- 
fect returns for a year; but in stating law of rent the 
average return is assumed. Situation, transportation 
facilities or any other characteristic that affects utility, is 
as important as fertihty in determining rent. 

6. Rent and the Land Owner. 
a. If the land is rented, contract rent tends to approxi- 
mate the economic rent more or less closely according to 
the extent that competition prevails. Custom, a feeling 
of obligation on part of the owner or other cause may 
leave part of the rent in the hands of the worker. If the 
land is worked by the owner, the economic rent accrues 
to him. It is not always differentiated by him from other 
parts of his income. 



50 Distribution of Wealth 

b. The capitahzation of the rent at the current rate of 
interest fixes the selling price of land. 

c. In some regions rents are not competitive, but are 
fixed by custom. Such are the system of farming on 
shares and the metayer system. 

7. Tendency of Rent. 
Other things remaining the same, an increase of popu- 
lation or of the standard of living raises rents. This is 
true both of rural and urban lands. This tendency may 
be checked by improvements in production or transpor- 
tation which increase supply. 

8. Justification of Rent. 

Private property in land rent is attacked by different 
classes of social critics. "The question of the justifica- 
tion of rent is not one of its existence but of its disposi- 
tion." While from the individual point of view there 
seems much ground for objection to individual appro- 
priation of that which is in part the gift of nature and in 
part social product, long experience shows private owner- 
ship of land has all in all advanced social welfare. Some 
of the "unearned increment" (not, however, peculiar to 
land) might be heavily taxed with social advantage. 

Required reading. Either a or b. 

a. Taussig, Prfnci/' /(?.?, chs. 42, 43, 44. 

b. Seager, Principles, §§ 73, 127-137, 368; Marshall, Eco- 

nomics of Industry, Bk. V., ch. 3, § 8, Bk. VI., chs. 9, 
10; Seligman, Principles, §§ 158-163. 

Suggested reading. Shaw, in Fabian Essays, The Economic 
Basis of Socialism; Smart, Distribution, ch. 26; Clark, Distri- 
bution, ch. 23; Pierson, Principles, pp. 93-120; Chicago Ma- 
terials, pp. 609-617 ; 620-639. 

D. Interest. 

1. Definition and Discrimination. 

a. Interest, in form paid for the use of money, is really 
paid for the use of capital which the money represents. 
In Economics the term refers to the earnings which re- 



Distribution of Wealth 51 

suit from use of capital, whether a loan be involved or 
not. That which seemingly is a high rate of interest 
some times conceals wages of management or insurance. 
b. The rate of interest on ordinary long loans is not 
affected by the supply of money, but in financial centers, 
since actual cash is often needed to meet obligations, the 
rate of interest on loans is directly affected by supply, 

2. The Normal Determination of Interest. 

a. Capital used in production or the influence of de- 
mand. The normal tendency is for "the gain, or premium, 
or interest, which the owners of capital will secure, to be 
determined by the least productive use of capital ; or, to 
be accurate in language, by the addition to the ultimate 
product of labor which results from the least effective 
phase of the roundabout or capital-using process. Those 
who use capital in ways more effective than the least can 
not retain the superior gain for themselves. Since all 
who have capital at command can turn to these more 
effective ways, competition will prevent any one set of 
persons from securing especially high gains from them. 
It is the effectiveness of the last installment of surplus or 
capital (last in the order of productiveness) that deter- 
mines the rate of gain for all capital. Or to put the same 
proposition in other words, the return to capital depends 
on its marginal productivity." (Taussig). Interest tends 
to equal the final productivity of a unit of capital, since 
each "will push the investment of capital in his business 
in each several direction until what appears in his judg- 
ment to be the margin of profitableness is reached." 
(Marshall). Were there perfect mobility of capital, the 
marginal productivity of capital in all trades would be the 
same because of the immediate transfer of marginal cap- 
ital from less to more productive uses. 

b. Influence of the conditions of supply of capital ; 
and the establishment of equihbrium. Marginal produc- 



52 Distribution of Wealth 

tivity itself, however, depends upon the amount of capi- 
tal. Were capital unlimited, there could be no interest. 
Where will this margin be located? Obviously at that 
point where the marginal productivity (or interest) is a 
sufficient reward to induce people to save that amount 
which will have this marginal productivity. That is, in- 
terest is fixed at that point which covers that which may 
be called a metaphysical cost of producing capital. Each 
piece of capital goods must as a rule produce not only 
enough for its own replacement, but also an amount suffi- 
cient to induce that social abstinence or forbearance 
which results in capital. Much saving is not under the 
incentive of interest, but marginal saving is. Interest 
tends to be fixed by a balancing of productivity and re- 
ward of forbearance — by demand and supply. 

3. Normal Tendency of Interest Approximated in Actual Society. 

Since the mobility of capital is much greater than that 
of labor, actual interest approximates the normal much 
more closely than do wages. The transfer of capital from 
less to more productive employments is brought about 
mainly by the direction of the replacement fund. Capital 
goods which do not earn, in addition to their replacement 
fund, current rates of interest are not replaced, and the 
portion of capital thus set free is turned into capital goods 
of the sort that promise the greatest earnings. Because 
of this mobility of capital, there is an approximation of 
interest rates in different employments to a general rate. 

4. Differences in Economic Interest. 
a. In spite of this tendency toward a general rate of 
interest, different capital goods are earning different rates 
because, an investment of capital once having been made 
with any degree of specialization and permanency, it can 
not be withdrawn immediately. Any change in economic 
conditions may make the rate above or below the current 
rate. 



Distribution of Wealth 53 

h. Differences in risk may also require larger earnings 
to attract necessary capital, although this apparently 
higher rate of interest is commonly a larger replacement 
fund. So social disrepute of a trade may require a higher 
rate of interest to attract capital to it, although such 
higher rate is almost universally composed partly of 
wages of management. 

c. There are differences in marginal productivity of 
capital in different localities because of the limitation of 
supply of capital in certain regions. 

5. Differences in Loan Interest. 

Competition tends to make a uniform rate of interest 
prevail in the same loan market. So perfectly does com- 
petition work that a difference of rate on loans of the 
same duration is evidence of difference in security. In 
addition to differences due to risk there are differences in 
loan rates in different regions. The money market is an 
international one. 

6. Tendency of Interest. 

With progress in civilization (which involves increase 
of wealth and capital, not only absolutely but relatively 
to labor and natural resources) the total product of capi- 
tal increases, but its marginal productivity decreases. 
The rate of interest tends downward, but the quantity and 
quality of capital are bettered to the advantage of the 
other factors in production. 

7. Regulation of Interest. 

Interest, prohibited in the Middle Ages, was at first al- 
lowed in certain contingencies and then generally with a 
limitation of the rate. Such regulation still prevails in 
many American states, but is contrary to the general 
tendency toward economic freedom. It is not only easily 
evaded, but tends actually to increase the rate to the 
necessitous borrower. Where equality in bargaining does 
not exist, regulation seems to have some justification. 



54 Distribution of Wealth 

8. Justification of Interest. 
For varying reasons in different ages objection has 
been made to the rightfulness of interest. Consideration 
of this topic is not within the scope of this course, but it 
should be noted that interest is now justified on the ground 
of social utility. The capital which is essential to progress 
would not be accumulated without the incentive of inter- 
est. Although the motive of saving is personal gain, the 
result is usually general advantage. 

Required reading. Either a or b. 

a. Taussig, Principles, chs. 38, 39, 40. 

b. Seager, Principles, §§ 149-154, 164; Seligman, Principles, 

§§165-170; Marshall, Economics of Industry, Bk. VI., 
ch. 1, § 7, ch. 6. 

E. Wages. 

1. Definitions and Discriminations. 

a. "Wages include all earnings assigned to men for 
their work from lowest piece wages to highest annual 
salaries and 'wages of management.' " They also include 
the return which comes directly to a man for his labor. 
Time ivages are paid for a quantity of time. Piece ivages 
are paid for a quantity of result. The relative advan- 
tages and disadvantages of time and piece wages depend 
upon the conditions of the particular trade, factory or 
job. The labor-cost under each tends to the same. 

h. "Real wages of labor may be said to consist in the 
quantity of the necessaries and conveniences of life that 
are given for it ; its nominal wages in the quantity of 
money." Real wages depend upon the nominal wages as 
modified by changes in the value of money, trade ex- 
penses, allowances, privileges, supplementary earnings, 
regularity of employment, certainty of success. 

Required reading. Marshall, Economics of Industry, Bk. VI., 
ch. 3; Seager, Principles, § 143; Chicago Materials, pp. 659-661. 



Distribution of Wealth 55 

2. Industrial Grades. 
There are infinite variations of efficiency from that of 
the most worthless of the "residuum" up to that of the 
ablest "captains of industry." For convenience five 
classes may be recognized : unusual managing, artistic 
and professional ability ; ordinary business, artistic and 
professional ability, and highly skilled mechanical abil- 
ity ; ordinary mechanical and clerical ability ; unskilled 
manual labor; the inefficient. Throughout history and 
over a great part of the world at present each grade has 
been recruited largely from its own children. In modern 
industrial democratic countries and especially the United 
States this is not so true; but it is debatable whether 
movement from grade to grade is now as easy as in our 
earlier history. 

Required reading. Taussig, Principles, ch. 47, §§ 5-8; Seager, 
Principles, §§ 139, 146; Marshall, Economics of Industry, Bk. 
VI., ch. 6, § 5. 

3. Determination of Wages in "Non-Competing Groups." 

Transition from one grade to another being difficult 
and slow, wages are determined by the demand for and 
supply of labor of each grade. These grades can not 
easily compete with each other. Thus are explained 
alike the wages of a great corporation president and of a 
laborer displaced by a machine. In all cases the ultimate 
cause is the demand of the consuming public. Competi- 
tion and substitution tend to adjust rewards to efficiency, 
working, as Professor Marshall says, through the inde- 
pendent business manager in the case of wages of em- 
ployees and on him so far as his own wage income is con- 
cerned. 

Required reading. Seager, Principles, § 147. 

4. General Explanation of Wages. 
Wages tend to equal final productivity of labor (mar- 
ginal productivity) of the particular grade, since "if there 



56 Distribution of Wealth 

is free competition and if all the laborers do their allotted 
tasks equally well, the share of the product ascribable to 
any of the workmen must be equal to the additions made 
by the last, or marginal, laborer actually at work." (Sel- 
igman). "Each individual laborer gets as wages approx- 
imately the equivalent of the amount which he individu- 
ally can add to the product of the group to which he be- 
longs." (Carver). Marginal, productivity itself, how- 
ever, depends upon numbers. Where will this margin be 
located ? Assuming that a certain standard of living will 
be held quite tenaciously through an acceleration or re- 
tardation of the marriage and birth rate ; and recogniz- 
ing that the cost of producing a certain efficient supply 
of labor is equal to this standard, it may be said that the 
normal tendency of wages is to equal the cost of securing 
or producing labor. 

Required reading. Taussig, Principles, ch. 48, §§ 1-4; Seager, 
Principles, §§ 141, 148; Seligman, Principles, §§ 174, 175; Mar- 
shall, Economics of Industry, Bk. VI., ch. 1, §§ 2-6, 8; ch. 2, 

5. Causes of Differences in Real Wages. 

Competition moving labor from less to more produc- 
tive trades, processes and regions, would tend to produce 
equality of wages were it not for certain hindrances and 
peculiarities in the action of demand and supply in refer- 
ence to labor. Such are : 

a. Differences in native ability. 

h. Immobility of labor. In spite of growing ease and 
cheapness of transportation, unwillingness of laborers to 
leave certain regions leads to relative over-supply and 
under-supply in certain districts and trades. 

c. The efficiency which enables men to enter the more 
highly paid trades depends largely upon the investment of 
wealth in giving right training; but this expenditure 
must be made largely by those who will not benefit by the 
result. 



Distribution of Wealth 57 

d. Labor is perishable. The laborer must sell his 
labor at the best price obtainable or lose it entirely. His 
urgent need leads to bad bargains. 

e. Labor is at a disadvantage in bargaining as com- 
pared with the employer in respect to reserve power, com- 
petitive skill and knowledge of the market. 

/. Supplies of labor are slowly produced so that a 
relative deficiency is slowly made up and a relative over 
supply slowly removed. This is an effective cause of dif- 
ference in proportion as the period necessary for acquir- 
ing the necessary skill is short or long. 

Required reading. One of the following: Marshall, Economics 
of Industry, Bk. VI., chs. 4, 5 ; Taussig, Principles, ch. 47, §§ 3-5 ; 
Seager, Principles, § 142. 

Suggested reading. Mill, Principles, Bk. II., ch. 14. 

6. Further Causes of Differences in Money Wages. 
Even when the net advantages and disadvantages of 
wages in different trades are the same, nominal differences 
may result from the following causes : 

a. Differing costs of living. 

b. Cost of learning trade. 

c. A trade may have relatively small money wages 
because of the supplementary earnings, leisure or other 
attractions connected with it. 

d. Danger incurred. A high wage may be partly com- 
pensation for risks involved in the calling. 

e. Social esteem. Social esteem or prejudice may ac- 
count for difference in wages. 

/. A high money wage for the day, week or year may 
not involve high wages for the entire life of the worker, 
if work be irregular or if the length of effective working 
life be short. 

g. A low nominal wage may be accounted for by un- 
usual chances for great success or certain promotion. 



58 Distribution of Wealth 

Required reading. Bullock, Selected Readings in Economics, 
pp. 543-563, being Adam Smith on difference in wages. Marshall, 
Economics of Industry, Bk. VI., ch. 3, §§ 3, 4; Seager, Princi- 
ples, § 144; Taussig, Principles, ch. 47, §§ 1, 2. 

7. Reasons for the Continuance of Difference in Real Wages. 

Differences in marginal productivity tend to fix wages. 
These differences in productivity are due to unequal abil- 
ities which are the result of all those facts of heredity and 
-environment which affect efficiency. In the environment 
may be emphasized such influences as home surroundings 
and standard of living, length and character of school 
training, child labor, caste and social prejudice. The 
continuance of a certain standard of wages is largely due 
to these wages which fix the standard of living, which in 
turn largely determine efficiency upon which productiv- 
ity and, in the long run, wages depend. Such is the circle 
of influence. 

Required reading. Seager, Principles, §§ 145, 146. 

8. Influence of Wages on Supply of Labor. 
Wages in a static society would be determined by sup- 
ply as well as by demand. Does the supply of efficient 
labor respond in real life to changes in demand as shown 
in wages ? 

a. Increased remuneration stimulates to increased ex- 
ertion. 

b. Increased remuneration stimulates to better prep- 
aration and hence greater efficiency. 

c. Increased wages, so far as they improve the stand- 
ard of living, not only increase efficiency but increase the 
number of the population surviving to productive age. 

d. Increased wages tend over a great part of the world 
to accelerate marriage and to increase the birth rate, al- 
though in modern industrial countries this seems to be a 
cause of fluctuation about a gradually decreasing birth 



Distribution of Wealth 59 

rate that has come with higher standards of material 
comfort. 

e. All things considered, then, an increase in wages 
above the prevailing standard of living (which is in a 
sense the cost of production of labor) tends to increase 
the supply of efficient labor. This standard of Hving is 
not, however, a fixed minimum of existence but a more 
or less elastic standard held with varying degrees of 
tenacity by different groups and individuals. Trade 
Unionism tries to raise this standard of living and to 
make it universal. It tends steadily upward largely be- 
cause of social action. 

Required reading. Such of the following as were not read 
when the "Amount of the Labor Force" was under consideration : 

Taussig, Principles, chs. 52, 53; Seager, Principles, §§ 168-173; 
Seligman, Principles, §§ 173, 176; Marshall, Economics of In- 
dustry, Bk. VI., ch. 2, §§ 1, 2. 

Suggested reading. Smart, Distribution, Bk. II., chs. 14, 16, 17, 
18; Pierson, Principles, pp. 315-331; Webb, Industrial Democ- 
racy, pp. 632-643. 

9. Conclusion as to Wages. 
In our actual society wages tend to be fixed by produc- 
tivity and the standard of living; but very slowly and 
inaccurately. Since the economic changes of modern 
times are constantly following one another, even that ad- 
justment which might be brought about slowly is never 
realized. Many wages are higher or lower than our only 
standard of justice, merit, would set. Even though men 
are rewarded according to the values they produce, these 
values are, because of social changes, variable and even 
fickle in some lines of production. Though the tendency 
is for men to be rewarded according to the efforts they 
put forth and according to the skill they have acquired, 
they frequently are not. Here then is the basis for the 
charge that our distribution involves social injustice. 
But these changes "largely neutralize one another . . . 
and cause the actual form of society to hover much nearer 



60 - Distribution of Wealth 

to the theoretical static form than would be possible if 
these influences worked separately." (Clark). Further, 
it is the profits resulting to entrepreneurs from these 
changes which are the incentive to economic improve- 
ments, the results of which, in the long run, go very 
largely to labor. 

The departures of distribution from the principle of 
reward according to merit are not due to arbitrariness but 
to general social influences. Wages are social assess- 
ments of worth as judged at the time — often capricious 
and fickle, but very largely on a sound basis. 

Required reading. Marshall, Bconomics of Industry, Bk. VI., 
ch. 5, § 4; Seligman, Principles, § 175; Chicago Materials, pp. 
647-659. 

Suggested reading. Taussig, Principles, ch. 51 ; Clark, Dis- 
tribution, ch. 25; Marshall, Principles, Bk. VI., ch. 2; ch. 5, §§ 
4-7; Smart, Distribution, Bk. II., entire, but especially chs. 1-13, 
19, 28. 

F. Conclusion as to Actual Distribution. 

a. The rewards of the factors of production are de- 
rived from and depend upon the values of the commodi- 
ties they produce. But in a more fundamental sense the 
values of commodities depend upon these rewards of the 
factors of production. 

h. The same fundamental principles determine the 
values of commodities and of the factors of production. 
In each case it is the marginal utility ; but the margin is 
fixed by the forces of supply, or in other words, by the 
cost of production. 

c. Capital and labor not only co-operate, but compete ; 
and since marginal quantities of either are readily substi- 
tuted for marginal quantities of the other when more effi- 
cient in proportion to cost, their marginal prices are rela- 
tive to their efficiencies. "The law which determines the 
division of the product between labor and capital in com- 



Distribution of Wealth 61 

petitive industries for a society in a state of normal 
equilibrium is, therefore, that each receives the share 
that it produces." (Seager). 

d. The same tendencies hold for the prices of produc- 
tive factors as for the prices of commodities, that is, 
wages and interest tend to equal marginal productivity ; 
but wages and interest have a close relation to cost of 
securing the supply of labor and capital. "Supply price 
and demand price tend to be equal; wages [and interest] 
are not governed by demand price nor by supply price, 
but by the whole set of causes which govern demand and 
supply." (Marshall). The "National Dividend is at once 
the aggregate net product of, and the sole source of pay- 
ment for, all the agents of production within the coun- 
try ; . . . the larger it is, the larger, other things being 
equal, will be the share of each of them." An increase in 
the amount of any one agent will be an advantage to all 
by increasing the national dividend ; but may be disad- 
vantageous to the particular agent, since the lowering of 
its marginal productivity may more than offset its share 
of the increased total production. 

e. Even in our actual changing society distribution is 
not accidental or arbitrary ; nor is it under the control of 
the powerful ; but tends to approximate to the principle 
of reward according to deserts. But rapid changes in 
modern society, the interference with the perfect working 
of competition, the monopolistic conditions that prevail 
and the immobility of labor due largely to its not being a 
mere commodity, result in many departures from a de- 
sirable result. There is, then, opportunity for social ef- 
fort to minimize these departures from an ideally just 
distribution. The Labor Problem deals with such topics. 

Required reading. One of the following: Seager, Principles, 
§§ 155-159, 160-166, or Marshall, Economics of Industry, Bk. VI., 
chs. 2, 11. 



CHAPTER VII. 
CONSUMPTION. 

(References will be found at the end of the chapter). 

1. Definition and Discrimination. 

Consumption is the destruction of utility. The purpose 
of production is consumption and the purpose of much 
consumption is production — an incessant cycle. Eco- 
nomic consumption is the destruction of utility for the 
sake of advantage ; is either unproductive of wealth or 
reproductive of wealth. Uneconomical consumption is 
waste. 

2. Dependence of Consumption on Utility. 

The consumption of a person depends upon his psycho- 
logical organization and character. "The art of consump- 
tion consists in knowing when to leave off in one thing 
and begin in another. The ideal of consumption is at- 
tained when the marginal utilities of the articles con- 
sumed are all equal." (Nicholson). 

3. Dependence of Consumption on Price. 

o. Consumption is directly dependent upon price and 
therefore constantly limited or stimulated by all changes 
in methods of agriculture, manufacture, transportation 
and communication. This dependence of consumption on 
price frequently leads people to be affected unduly by 
prices. Useless things and articles of poor quahty are 
bought because of low nominal price. 

h. Price, however, has significance only when com- 
pared with income. Income represents a person's pro- 
duction of utiHty as socially estimated. Ought a person 
to consume more utiHty than he produces ? It should be 



Consumption 63 

remembered that many most valuable social services are 
not directly paid for. 

4. Dependence of Consumption on Distribution. 

The degree of equality in distribution in a social group 
shapes its consumption. The same group income on an 
antebellum plantation and a Brook Farm would produce 
very different results. Communal or social consumption 
is economical of wealth ; but economy is not desirable at 
the expense of broader social considerations. 

5. Effect of Consumption on Production and its Methods. 

a. The stimulus to economic progress and industry is 
found in wants. A large proportion of all consumption 
tends directly or indirectly to further production of 
wealth. 

b. Where capital and labor are not fully employed, de- 
mand for commodities may increase employment of labor. 
Ordinarily, demand directs rather than employs labor. 
The mere destruction of wealth does not produce wealth. 
The consumer determines the form of wealth produced. 
Demand for luxuries is no more a demand for labor than 
any other expenditure. The direction of labor into cer- 
tain lines results in a permanent means of further pro- 
duction or enjoyment, in contrast with that which is 
merely transitory. The consumer determines whether a 
beautiful or an ugly thing shall be produced. He chooses 
between a rapid or slow destruction of wealth. 

c. Consumers determine the numbers employed in 
each occupation. Some of these occupations are educa- 
tional and intend to encourage development of productive 
skill; while others are debasing and not productive of 
wealth. Consumers determine industrial methods. Wheth- 
er it be sweatshop or factory, child labor or skilled adult 
labor, hand or machine, craftsmanship or highly special- 
ized labor, is for the consumer to decide. The department 
store and the trust are due to the patronage of the public. 



64 Consumption 

6. Relation of Consumption to Accumulation. 

Saving is in reality the accumulation of wealth, most of 
which becomes, by investment, capital. If all should save 
in an extreme degree, there would be a falling off in de- 
mand for the very goods which the saving would help 
produce. The right proportion between saving and con- 
sumption is attained automatically through price, wages 
and interest. At present the greatest need is an increase 
of expenditure for the promotion of efficiency in workers. 

7. Ethical Aspects of Consumption. 

a. Because of the reaction of the use of wealth on 
character, it is a profoundly ethical question what one 
buys and consumes. 

b. There is much waste of wealth due to the choice of 
the perishable rather than the durable ; to imperfect util- 
ization ; and to individual rather than social ownership 
of certain forms of wealth. Not all high prices involve 
great cost. 

c. Equally important is the effect of one's consump- 
tion on the lives of others. Because of the complicated 
nature of our productive system, the purchase of an arti- 
cle which may in no way injure its consumer, may involve 
physical, intellectual, artistic and moral debasement to 
others. Although for the most part unconsciously, there 
is, perhaps, no way in which the average person influ- 
ences the lives of others more constantly than by his ex- 
penditure. Unnecessary personal service, degrading oc- 
cupation, long hours and bad sanitary conditions in store 
and factory, the sweatshop, child labor and many other 
industrial evils could not exist were consumers aroused to 
their ethical obligations and organized so that they might 
be informed. The Consumers' League aims to meet this 
demand. Labor Legislation and the Trade Union Label 
are further forces in this direction. As Democracy 
in its social sense, or as Miss Addams puts it, "identifi- 



Consumption 65 

cation with the common lot," prevails, the aroused con- 
science of the consumer will be a great force working for 
social advancement. 

8. Consumption Reflects Social Progress. 

The civiHzation of every period is largely shown by its 
consumption — its buildings, weapons, utensils, objects of 
art, clothing, etc. The costumes of the different classes 
in the middle ages were a reflection of the constitution of 
the society of the times. The disappearance of these dis- 
tinctive caste costumes is a part of our democratic tend- 
ency. The alleged "aping of their superiors" which leads 
those of small incomes to dress like the well-to-do is but 
a striving to realize that Christian Democracy which most 
profess. 

Statistics of consumption throw much light on the 
question of the progress of the working classes. 

Required reading. Bullock, Selected Readings in Economics, 
pp. 307-318; Seager, Principles, §§ 47-50; Seligman, Principles, 
§ 255 ; Marshall, Economics of Industry, Bk. III., ch. 6, § 3. 

Suggested reading. Fetter, Economic Principles, ch. 37; Gide, 
Principles, Bk. V. ; Andrews, Institutes, §§ 50, 124-131 ; Walker, 
Political Economy, Pt. V., ch. 3; Hadley, Economics, pp. 318- 
335; Palgrave, Dictionary, articles Consumption and Luxury; 
Leslie Stephen, Social Rights and Duties, Essay on Luxury; de 
Laveleye, Luxury ; Thompson, The Purse and the Conscience ; 
Stevenson, Lay Morals, ch. 4; Fawcett, Manual of Political 
Economy, pp. 19-29 ; Ruskin, Time and Tide, Lecture 2nd ; 
Munera Pulveris, ch. 6; Crown of Wild Olives; A Joy Forever; 
Unto This Last; Morris, Architecture, Industry and Wealth, 
chs. 3, 4; Say, Treatise on Political Economy, Bk. IIL, chs. 4, 5; 
Smart, Studies in Economics, chs. 8, 9, 10; Taylor, Exercises in 
Political Economy, ch. 9; Richardson, The Woman Who Spends; 
Veblen, Theory of a Leisure Class; Blatchford, Merrie Eng- 
land, ch. 23; Roscher, Principles of Political Economy, Vol. IL, 
pp. 221-252; Allen, Democracy and Diamonds, Contemporary, 
59 : 666 ; Addams, The Social Ministry of Wealth, Int. Jour, of 
Ethics, 4:173; Davidson, Luxury and Extravagance, Int. Jour, 
of Ethics, 9:54; Devas, The Moral Aspect of Consumption, Int. 
Jour, of Ethics, 10:41; Greg, What is Culpable Luxury"?, Con- 
temporary, 21:216; Smith, Mr. Greg on Culpable Luxury, Con- 
temporary, 22:126; de Laveleve, Morals of Luxury, Pop. Sci. 
Mon., 28:669; Leroy-Beaulieu, The Office of Luxury, Pop. Sci. 
Mon.^ 47:25; The Social Function of Wealth, Pop. Sci. Mon., 



66 Consumption 

48:829; Martin, Is Lavish Expenditure of Wealth Justifiable?, 
19th Century, 44 : 1024 ; Moran, The Ethics of Wealth, Am. Jour. 
Sociology, 6 : 823 ; Sidgwick, Luxury, Int. Jour, of Ethics, 5:1; 
Simey, Luxury, Ancient and Modern, Econ. Rev. 12: 146; Luxury 
in America, Spectator, 82:482; The Duties of the Very Rich, 
Spectator, 78 : 168 ; Culpable Luxury, Sv^ctditor, 77 -.SW; Ward, 
The Use and Abuse of Wealth, Forum, 2: 549; George, The In- 
telligence of Woman, ch. 3 ; Reports and Pamphlets of the Con- 
sumers' League and of the National Consumers' League. 



CHAPTER VIII. 

MONEY. 

1. Definition, Function, Origin. 

a. The word money is used in different senses as the 
point of view is scientific, popular, financial, legal, or 
figurative. It may be defined as "a generally accepted 
material means of payment and medium of exchange." 
(Fetter). 

b. Money serves as a medium of exchange, a measure 
of value and a standard of deferred payment. An im- 
portant function of money is to serve as a cash reserve 
to insure solvency. 

c. The divisions of occupations made necessary ex- 
change which was at first carried on by barter. Barter 
has serious disadvantages, since each article must be 
valued in terms of all others ; since many articles are not 
subdivisible ; and since there is such limited correspon- 
dence between needs and goods. 

d. Gradually certain articles, very generally desirable, 
were selected as media of exchange. These articles were 
frequently connected with the industry of the time. 

e. The qualities necessary for a satisfactory money 
are general desirability, durabihty, divisibility, adapta- 
bility to coinage, high value in proportion to bulk, steadi- 
ness of value. 

/. Government, then, does not arbitrarily select the 
money commodities, but recognizes actual usage. Gov- 
ernment gives certainty and definiteness to money by es- 
tablishing a standard of weight and fineness. Govern- 
ment also declares certain money legal tender, which 
must then be received in payment of debt. 



68 Money 

Required reading. Bullock, Selected Readings in Economics, 
pp. 387-405; Seager, Principles, §§ 177, 179; Seligman, Princi- 
ples, § 186; Taussig, Principles, ch. 17, §§ 1, 2; Chicago Materials, 
pp. 443-451 ; Holdsworth, Money and Banking, §§ 1-7, 9-12. 

2. Coinage. 

a. Coins are "ingots of which the weight and fineness 
are certified by the integrity of designs impressed upon 
the surface of the metal." (Jevons). Coinage has under- 
gone a long process of evolution. At first the quality of 
the metal was attested by the seal of a ruler. Then the 
weight was stamped on the coin. Successive changes 
have by gradual selection resulted in the present form of 
coin. 

b. "Free Coinage" means that anyone may bring any 
amount of bullion to the mint and have it coined. If this 
work of coinage is done without charge the coinage is said 
to be gratuitous. A charge for coinage equal to the ex- 
pense involved is called brassage. If more metal is kept 
by the government than is sufficient to cover cost, this 
deduction is called seigniorage. 

d. Mobility of the precious metals from monetary to 
other uses and vice versa is secured by free and gratuitous 
coinage. Desirable as this is in the case of standard 
coins, it involves expense and inconvenience without com- 
pensating advantage to have the lesser coins turned into 
bullion without loss. Limited issues of small coins hav- 
ing less than their proportionate share of metal are there- 
fore made and called subsidiary or token coinage. Such 
coins are usually legal tender to only a limited amount. 

e. The "mint price" is the amount of money which a 
given amount (usually an ounce) of metal will produce 
when coined. The mint price of gold in the United States 
is $20.67 per ounce. 

Required reading. Taussig, Principles, ch. 17, §§ 3, 4; Seager, 
Principles, § 180; Seligman, Principles, § 188. 



Money 69 

Suggested reading. Hadley, Economics, §§ 208, 210, 211; 
White, Money and Banking, Bk. I., ch. 2; Johnson, Money and 
Curreticy, pp. 177-187, p. 12. 

3. Value of Money. 

a. The value of money is its power in exchange. It 
is high when prices are low ; low when prices are high. 
The value of money is determined by the demand for 
and the supply of money. Other things remaining equal, 
diminishing marginal utility decreases the value of money 
as its quantity increases. 

b. Cost of production is related to the value of money 
as it is to any other value, but its influence is felt slowly 
because the existing stock is very large compared with 
the annual production. If the level of prices is low, then 
production of the money commodity is accelerated. Also 
if the cost of production of the money commodity is de- 
creased, its production is accelerated. 

c. Changes in value of money may proceed from a 
change in amount of goods offered for sale ; from a 
change in the quantity of the money commodity pro- 
duced ; from a change in the relative amount of the 
money commodity demanded in the arts ; or from a 
change in the rapidity of circulation. 

d. Since every change in the value of money reacts 
upon business, upon the cost of living and upon obliga- 
tions of debtors and claims of creditors, steadiness of 
value is most necessary. 

e. Changes in value of money are best ascertained by 
index numbers. Comparison of the weighted averages of 
the prices, at different times, of carefully selected list of 
commodities will indicate whether the general price level 
is rising or falling, and consequently whether money is 
more or less valuable. As indications of changes in gen- 
eral well-being, index numbers must be used with cau- 
tion since they "deal with payments for products and not 
for services ; — with wholesale prices instead of retail 



70 Money 

ones; — [and] are based on prices in the wholesale mar- 
kets nearest the point of consumption." (Hadley). 

/. Under free coinage the division of a precious metal 
between the arts and monetary use is determined by the 
relation of the marginal utility in one use to that in the 
other. 

g. If the money supply of a country is large compared 
with that of other countries, prices in that country will 
be relatively high. The resulting excess of imports into 
that country will in time cause an export of money. A 
deficiency of money will cause a reverse tendency. This 
is commonly described as the International Distribution 
of Money. 

h. Sir Thomas Gresham (16th century) observed that 
when such a movement of money occurred, full weight 
coins were selected for export since they were taken 
abroad only by weight, while worn or debased coins were 
kept at home, since they passed for face value. He enunci- 
ated the law that "bad money always drives out good 
money." This is true only when the country has relatively 
to others an excess of money. Thus qualified the principle 
explains the shipments of the more valuable metal from 
a bimetallic country and the exports of metallic money 
from a country issuing paper money in excess. 

i. A temporary relative deficiency of money in one 
country results in a rise of interest on short term loans in 
that country. This attracts money from foreign banking 
centers. Should the deficiency be more permanent or 
serious, it is overcome by the principle of the Internation- 
al Distribution of Money. 

Required reading. Either a, b, or c. 

a. Taussig, Principles, ch. 18; ch. 19, §§ 1, 5. 

b. Seager, Principles, §§ 181, 207-210; Seligman, Principles, 

§§187-190, 192. 

c. Holdsworth, Money and Banking, ch. 6. 



Money 71 

Suggested reading. Bullock, Introduction, §§ 137-142, 145, 147- 
150, 152-154; Hadley, Economics, §§ 212, 216-229; Johnson, Money 
and Currency, pp. 17-33, 103-134, 194-201. 

4. The Production of the Precious Metals and Their Relative 
Value. 

a. The forms in which the precious metals are found 
in the earth and the methods of extracting them have had 
and still have important effects on their monetary value. 
Gold is one of the most widely distributed metals. It is 
found in various forms and is extracted by various meth- 
ods. The modern application of capital and science has 
had important results on its supply and value. The cost 
of producing silver has also been much reduced in the 
same way. 

b. In the ancient world great stores of gold and silver 
were accumulated for non-economic reasons. Scattered 
by conquests they had beneficial effects on commerce. 
Scarcity of the precious metals during the later Roman 
Emipire and the Middle Ages had serious economic, po- 
litical and social results, while the new supplies after the 
discovery of America caused a great increase in prices, 
stimulated commerce, affected tremendously political and 
social conditions and aroused economic thought. 

c. In the ancient world an ounce of gold seems to have 
been worth ten or eleven ounces of silver. From about 
1680 until 1873 the ratio fluctuated about one to fifteen, 
even though at times the relative productions of the two 
metals was in very different ratio from that. For exam- 
ple, the gold discoveries of 1849 in Cahfornia and Aus- 
tralia increased the production of gold from something 
like one-thirtieth of that of silver by weight to over one- 
fifth of it ; but the ratio of value of gold to silver changed 
only from something over fifteen and one-half to some- 
thing less than fifteen and one-half. 

d. Between 1873 and 1896 a decline in the production 
of gold and an increase in silver production were accom- 



72 Money 

panied by a decided decline in the relative value of silver. 
Since 1896 there has been an enormous increase in the 
production of gold which has had and is still having 
revolutionary effects upon prices and social conditions ; 
but the value of silver still remains far below the his- 
torical ratio. 

Required reading. Seligman, Principles, § 193; Taussig, Prin- 
ciples, ch. 19, §§ 2, 3, 4; Chicago Materials, pp. 461-465. 

Suggested reading. White, Money and Banking, pp. 41-59; 
Johnson, Money and Currency, pp. 208-216 ; Walker, Money, chs. 
5-8; International Bifnetallism, chs. 1, 2; International Encyclo- 
paedia and other Encyclopaedias under Gold and Silver. 

5. Government Paper Money. 

a. Coin certificates certify that metallic money is on 
deposit with the government and is payable to the holder 
of the certificate. United States gold and silver certifi- 
cates are examples. Such money is convenient, but adds 
nothing to the volume of money and has no effect on 
prices. 

b. Redeemable paper money is a government promise 
to pay a certain amount of metallic money on demand, is 
in such a form as to circulate as currency, is usually legal 
tender and is actually redeemed in metal on presentation. 
United States "greenbacks" since 1879 have been of this 
description. Such money is convenient ; it is cheaper than 
gold or silver since it sets a certain amount of metal free 
for other uses ; it is safe provided it is so limited in 
amount as not to drive all metal from the country and if 
prompt redemption is maintained. If introduced into the 
circulation gradually it would have the same effect as an 
equal amount of metal. Since these conditions depend 
upon the faith of the issuing government and since it is 
usually issued in times of great financial need, redeem- 
able paper usually becomes irredeemable. 

c. Irredeemable paper is a mere promise to pay, or 
even a mere assertion of value, forced into circulation by 



Money 7Z 

being made legal tender. Were such money strictly lim- 
ited in amount, or so regulated in amount as to preserve 
a uniform level of prices, it would be a cheap and effec- 
tive means of exchange within a country. In actual ex- 
perience over-issue has almost invariably resulted, either 
because the urgent financial needs of the government led 
legislators to increase issues ; or because debtors have 
successfully agitated for cheap money with which to pay 
their debts. Our colonial paper moneys, the Continen- 
tal Currency, the United States Civil War issues, the 
Confederate Currency, the French Revolutionary assig- 
nats and many other examples show that paper money, 
nominally limited and redeemable, is over-issued and be- 
comes irredeemable. It causes inflation, depreciation, 
over-speculation. ■ It is unjust to creditors, to those on 
fixed incomes, to workmen ; and works general injury. 

Required reading. Taussig, Principles, ch. 23, §§ 1, 2, 4, 7; 
Chicago Materials, pp. 485-498; Holdsworth, Money and Bank- 
ing, §§ 29-33. 

Suggested reading. Bullock, Selected Readings in Economics, 
ch. 15. 



CHAPTER IX. 
CREDIT AND BANKING. 

A. The Nature of Credit and its Forms. 

a. "Credit may be defined as the power to secure com- 
modities or service at the present time in return for some 
equivalent promised at a future time." (Bullock). Credit 
is based upon confidence in the honesty of the debtor and 
in his ability to secure the value promised. It is a means 
of transferring capital ; lies at the basis of all modern 
business ; and is an important factor in wealth produc- 
tion, since by means of it capital passes from the less to 
the more profitable uses. 

b. The most important forms of credit are book ac- 
counts, promissory notes, checks, drafts, bank notes. 

Required reading. Seager, Principles, §§ 188, 189; Seligman, 
Principles, § 198; Holdsworth, Money and Banking, ch. 7. 

B. Banks and Banking. 

1. Banking Functions. 

a. A bank is "a manufactory of credit and a machine 
of exchange." J. F. Johnson says : "The reader must rid 
his mind of the common notion that a bank deals in 
money. Just as a hardware store handles hardware, a 
dry-goods store dry goods, or a grocery store groceries, 
so a bank handles credit. Money is not the thing it deals 
in any more than money is the thing in which a hardware 
store deals." 

b. A person having wealth in process of manufacture 
or sale may have no acceptable means of payment for an 
extension or continuance of his business, even though he 



Credit and Banking ' 75 

have much wealth. His credit, based on his wealth, may 
be taken by a bank in return for its own credit which will 
have more general acceptability as a means of payment, 
than would his. His wealth, unavailable as a means of 
payment, becomes the basis of an available means of 
payment. 

c. A bank by loaning or guaranteeing credit thus 
creates a most important, if not the most important, med- 
ium of payment in modern business. Although personal 
credit may and does serve as a medium of payment, the 
specialization of the work of examining and attesting it 
in banks greatly faciHtates and extends its use. A good 
banking system aids enormously in the production of 
wealth. 

d. The more concrete functions of a bank by which it 
performs its general function of making credit are 

(1) Discount. In exchange for a promissory note (or 
other form of credit) involving a promise to pay a speci- 
fied sum at a specified rate, and properly secured, the bank 
gives the right to receive at once the amount promised in 
the note less the interest for the time the note will run. A 
right to receive value in the future is sold for a right to 
receive less value at present. 

(2) Deposit. While the proceeds of the note may be 
drawn in money at once, they are commonly entered in 
the books of the bank as a deposit to the credit of the 
borrower. As such they may be drawn in money from 
time to time or transferred by check. This right to draw 
at will may also result from the actual deposit of money 
or credit instruments that are claims on others. The de- 
posit is thus a liability of the bank which serves as a 
medium of payment. 

(3) Issue. The bank note, or general promise of a 
bank to pay money, is essentially the same as a deposit, 
being a liability of the bank which serves as a medium of 



7^ Credit and Banking 

payment. It is different in form and often in security. 
Whether the depositor will use the deposit or bank note 
as a medium of payment depends upon his business and 
convenience. 

e. Loans and deposits tend to fluctuate simultaneously, 
not mainly, as commonly thought, because money depos- 
ited is loaned out, but because loans result in deposits. 

/. Banks facilitate business in other ways, collecting 
notes and bills of exchange, serving as financial agents, 
buying and selling foreign exchange, etc. 

Required reading. Either a or h. 

a. Dunbar, Theory and History of Banking, ch. 2. 

b. Taussig, Principles, ch. 24, §§ 1, 2, 3; Seligman, Princi- 

ples, § 200; Seager, Principles, §§ 192, 193; Holds- 
worth, Money and Banking, ch. 10 

2. Kinds of Banks. 

a. Banks of deposit and discount are those whose 
functions are those just described. Issue is not an essen- 
tial function. In the United States such banks may be 
chartered by the national or state government, may be 
private, or may be trust companies having, as such, other 
financial functions. Only banks chartered by the national 
government now issue notes in this country. 

b. Savings banks exist to receive and invest compara- 
tively small sums. In some states they are philanthropic 
in nature. Under the best regulated state systems they 
do not do a general banking business, but invest only in 
certain approved kinds of securities. 

Suggested reading. Holdsworth, Money and Banking, chs. 
18, 19. 

3. Banking Operations and Accounts 

a. The joint stock company is the general form of or- 
ganization. The stockholders of an incorporated bank 
elect a board of directors in whose hands rests the entire 
manasfement of the bank during their term of office. 



Credit and Banking 77 

b. The capital is the amount of money subscribed by 
the shareholders when the bank is organized. In the 
United States it is usually divided into shares of $100. 
Different rules prevail under different bank systems as 
to the proportion of the capital that must be paid in be- 
fore business is begun. The surplus paid in by share- 
holders or accumulated from profits is practically an addi- 
tion to capital. The function of capital and surplus is to 
serve as a guarantee of ultimate solvency. Should losses 
be met, they fall on surplus and capital. 

c. Since the bank must meet all claims promptly, its 
investments must be such as can be turned into cash 
quickly. Short term business paper and bills of ex- 
change are the most common investments. Properly se- 
cured by endorsement or collateral they are safe ; the 
rate of interest upon them is equal to that on other equally 
safe investments ; and since they are constantly falling 
due, they enable a bank to expand or contract loans 
quickly. A bank may also invest in stocks and bonds that 
have a quick market, especially if it has many steady ac- 
counts. Real estate, except a banking house, is a bad 
banking investment. The greater the amount of invest- 
ments the greater the income. A bank, then, desires to 
invest all its funds ; but since it must meet in legal tender 
money on demand all claims of deposits, it must so limit 
its investments as to have sufficient for this purpose. 

d. The reserve is the amount of legal tender money 
kept on hand by a bank in order to meet promptly all de- 
mands. Its function is not so much to secure ultimate as 
immediate payment of obligations. The amount of re- 
serve that should be kept depends upon the nature of a 
bank's business and the general financial condition of 
the country. The proportion is sometimes prescribed by 
lavi^. Reserve is estimated as a percentage against de- 
posits, or in some cases, against all demand liabilities. It 
may be increased either by increasing money on hand, or 



78 Credit and Banking 

by decreasing liabilities. A contraction of loans is the 
most frequent actual process of accomplishing such in- 
crease. 

e. A bank statement issued periodically sets forth in 
more or less detail a bank's condition. On one side are 
given the liabilities which are of two general classes ; 
those due to the shareholders as such ; and those due to 
all others. The following is a simple example of a state- 
ment of a bank that does not issue notes : 

ASSETS. LIABILITIES. 

Loans, . . . $595,621 < Capital, . . $100,000 

Stocks and bonds, 130,000 Surplus, . . 20,000 

Real Estate, . 30,000 Profits, . . 5,649 

Other assets, . 2,659 ^ Deposits, . . 754,237 

Expenses, . . 1,506 

Reserve, . . 120,100 ' $879,886 



$879,886 

Required reading. Taussig, Principles, ch. 25 ; Seligman, 
§ 201 ; Chicago Materials, pp. 517-525. 

Suggested reading. Dunbar, History and Theory of Banking, 
ch. 3 ; Holdsworth, Mo7iey and Banking, chs. 12, 13, 16. 

4. The Check System. 

0. When a bank credit takes the form of a deposit it 
becomes a circulating medium through the check system. 
If A who draws the check and B who receives it have ac- 
counts in the same bank, the amount of the check is 
charged against A's account and credited to B's. A's 
original debt to B is paid by a transfer of a claim upon a 
bank without the use of money. 

b. If A and B have accounts in different banks, the 
check drawn by A upon the Farmers bank is credited to 
B in the Merchants Bank when there deposited by him. 
The check is now a claim of the Merchants Bank upon 
the Farmers Bank. When paid directly or indirectly by 



Credit and Banking 79 

this, it is charged against A's account. A's debt has been 
paid by book entries involving transfers of claims. 

c. The clearing house is an institution for facilitating 
exchange and settlement of checks. To the clearing house 
each bank sends every business morning all the checks 
upon other banks in the city received by it the previous 
day so arranged as to be distributed quickly to banks 
against which they are drawn. From the other banks 
each bank receives all the checks drawn against it and 
deposited in them the previous day. The checks brought 
in by a bank represent its total credit or claim ; those re- 
ceived by it at the clearing house represent its debit or 
obligation. The difference represents its debit balance 
which must be paid in money during the day ; or its 
credit balance which it is entitled to receive. The sum 
of claims against the clearing house equals the sum of its 
obligations ; and the sum of credit balances must equal 
the sum of debit balances. 

d. Checks drawn upon banks in smaller cities and de- 
posited in banks in other cities ("country checks") are 
paid by a more or less round about system of transfer 
from bank to bank. They are frequently finally settled 
either by offsetting obligations or by drafts on a financial 
center. Under the new Federal Reserve System they will 
be settled largely through the regional reserve bnaks. 

e. It is clear that by the mechanism of the check sys- 
tem deposits based upon loans, or in brief credit, are a 
most important medium of exchange, increasing and de- 
creasing automatically with changes in business, but al- 
ways dependent upon the existence of sufficient legal 
tender reserve to insure their prompt liquidation. 

Required reading. Taussig, Prmci/'/^j, ch. 24, §§ 4, 5, 6; Selig- 
man. Principles, § 200; Seager, Principles, § 191; Chicago Ma- 
terials, pp. 503-513; Holdsworth, Money and Banking, ch. 14. 

Suggested reading. Dunbar, Theory and History of Banking, 
ch. 4. 



80 Credit and Banking 

5. Bank Currency. 
a. The bank note is a promise to pay and, as has been 
shown, is essentially like the deposit since it is credit used 
as a means of payment. Being in convenient denomina- 
tions and often resembling government paper money, it 
circulates freely as money among all, including those 
unable to judge of its safety and those practically unable 
to refuse to accept it. Even the best systems of redemp- 
tion do not insure that constant test of worth which is 
found in the case of the check. For these reasons, based 
upon long experience, some protection of note holders as 
distinguished from other creditors of a bank has been 
generally deemed advisable. The more important meth- 
ods are the following : 

h. It is frequently made a prior lien upon the assets of 
the bank. This method may be combined with others. 

c. It is sometimes protected by the deposit (by the 
issuing bank) with some government authority of col- 
lateral security such as government bonds. From the 
sale of such securities in case of the inability of the bank 
to meet its obligations the note holders are reimbursed. 
If the securities accepted are carefully prescribed and if 
overissue is prevented by requirement that the notes be 
printed or stamped by the government, absolute safety is 
secured by this method, but elasticity, or quick response 
of the amount of notes to the fluctuating needs of busi- 
ness, is absent. 

d. The Bank of England notes up to a certain amount 
are protected by government obligations to the bank. 
Above that they are protected by an equivalent amount 
of gold becoming thus coin certificates. Absolutely safe 
they in no way add elasticity to the currency. 

e. In some banking systems, notably the Canadian, 
bank notes have been protected by a safety fund collected 
from all the banks by a percentage tax and used to pay 



Credit and Banking 81 

the notes of any insolvent bank. The fund in such cases 
is reimbursed entirely or in part from the assets of the 
bank according as the notes are or are not a prior lien. 
In the Canadian system such notes are limited to the 
amount of a bank's capital, are not legal tender, are 
promptly redeemed at redemption centers through the 
country and bear interest from the time of a bank's fail- 
ure to redeem until they are paid. These provisions in 
connection with its branch bank features make the Cana- 
dian bank note currency absolutely safe, elastic and very 
sensitive to the needs of different parts of the Dominion. 

/. Easy redemption will do much to prevent excessive 
issues and ensures safety. It is absolutely necessary un- 
less notes are protected by specie or bonds, and desirable 
even then. 

Required reading. Taussig, Principles, ch. 26, ch. 27, § 4; 
Seligman, Principles, §§ 204, 205 ; Holdsworth, Money and Bank- 
ing, ch. 20. 

Suggested reading. Dunbar, Theory and History of Banking, 
chs. S, 8, 10, 11; Scott, Money and Banking, pp. 166-176; ch. 10, 
describes foreign bank systems ; White, Money and Banking, 
(5th ed.) Bk. III., ch. 16 ; contains accounts of the foreign bank 
note system; Bagehot, Lombard Street. 

6, General Regulation of Banks. 
Experience shows that public regulation is essential to 
soundness. Such public control usually insists upon pub- 
licity and governmental inspection. Specific regulations 
are sometimes made as to allowable investments ; amounts 
that may be loaned to one person ; the proportion of re- 
serve ; the paying up of capital, etc. 
Suggested reading. Holdsworth, Money and Banking, ch. 17. 

C. Dangers of Credit. 

a. Unwise extension of credit promotes unwise expen- 
diture and extravagance. It sometimes encourages un- 
wise governmental or corporate expenditures. 



82 Credit and Banking 

b. Unwisely extended in business it promotes specula- 
tion and raises prices as does any increase of the medium 
of exchange. Such rising prices encourage further specu- 
lation and unwise investments. These tendencies may 
continue in ever widening circles until a vast volume of 
business is being done upon an artificial basis. Sooner or 
later confidence, which is the basis of credit, is shaken, 
prices fall rapidly, speculative undertakings and even 
sound ones fail, panic results and is often followed by a 
long period of depression before confidence can be re- 
stored and credit established. 

Required reading. Taussig, Principles, chs. 29, 30. 

Suggested reading. Hadley, Economics, §§ 274-280, 333 ; Selig- 
man, Principles, § 209; Marshall, Economics of Industry, Edi- 
tion of 1891, pp. 151-153. 



^^JCk 



CHAPTER X. 
AMERICAN MONETARY HISTORY. 

1. Before the Civil War. 

a. During the colonial period and the Revolutionary- 
War extensive issues of paper money were followed by 
the usual results of irredeemable currency. 

b. The Federal Constitution provides that Congress 
shall have power "to coin money, regulate the value there- 
of, and of foreign coin" ; and that "no State shall coin 
money ; emit bills of credit ; make anything but gold or 
silver coin a tender in payment of debts." 

c. The act of 1792, following Hamilton's recommen- 
dations, provided for free coinage of gold and silver at 
the ratio of 15 : 1. The silver unit was a dollar of 371^ 
grs. pure silver and the gold unit was an eagle of 247.5 
grs. pure gold. 

d. The value of silver declining, gold disappeared 
from circulation. In 1834 a law changed the ratio to 
16 : 1 by reducing the weight of gold to the dollar to 23.2. 
In 1837 the weight of gold to the dollar was made 23.22, 
making the ratio 15.98: 1. The weights and ratio of gold 
to silver have not since been changed. 

e. This act over valued gold and the gold discoveries 
of 1849 accelerated the withdrawal of silver from circula- 
tion. In 1854 silver coins less than one dollar in value 
were made token coins with limited legal tender quality. 
Until 1873 the United States remained legally bimetalHc 
but actually gold standard with an excellent subsidiary- 
coinage system. 

Suggested reading. White, Money and Banking, Bk. II., chs. 
2, 3 ; Bk. I., ch. 3 ; De-wey, Financial History of the United 
States, §§ 9-11, 15-17, 27, 29, 30, 44, 90. 



84 American Monetary History 

2. Civil War and Reconstruction. 

a. The sudden and enormous increase of war expen- 
ditures was met mainly by bond issues and increased cus- 
toms and internal revenue taxes. To meet pressing needs 
at the beginning of the war Congress authorized $450,- 
000,000 of legal tender government notes receivable by 
the government, except for duties on imports, and payable 
by the government, except for interest on the public debt. 
Their issue is generally thought to have been a mistake. 

b. Measured in gold the notes quickly depreciated ; 
prices of commodities rose but wages rose tardily. This 
meant an additional burden upon people already suffer- 
ing from heavy taxes. Specie payments and redemption 
of the notes ceased December 30, 1861. 

c. Depreciation of the paper currency finally drove 
silver subsidiary coins from circulation. The deficiency 
of small change caused great inconvenience. Fractional 
currency and copper coins were issued by cities and indi- 
viduals. Postage stamps were largely used in small trade. 
In July, 1862, Congress authorized the issue of postage 
currency in small denominations. In March, 1863, Con- 
gress authorized the issue of paper fractional currency 
receivable in payments to the government and exchange- 
able for legal tenders. This remained the small currency 
of the country until some years after the war. 

d. Speculation in gold was inevitable because its value 
in paper so continually fluctuated. In 1864, Congress 
prohibited dealing in gold for future delivery but the re- 
sults of this law were so serious that it was repealed fif- 
teen days after its passage. 

e. The constitutionality of the legal tenders was test- 
ed several times. At first the Supreme Court was unfav- 
orable but in 1871 it was decided that they were constitu- 
tional as a war measure and in 1884 that they were legiti- 
mate even in time of peace. 



American Monetary History y5 

/. During the same period the Confederate States 
were experiencing- to the utmost the evils of paper cur- 
rency. Immense quantities were issued by the Confed- 
erate government, by the individual states, by individuals 
and corporations under authority received from the 
States. They all became practically worthless soon. 

g. After the war retirement of the notes began but the 
panic of 1873 revived a demand for more paper money. 
President Grant checked the inflationist movement by 
veto of the inflation bill ; but the Greenback party was 
active from 1876 to 1880. 

h. In January, 1875, the Resumption Act was passed 
providing for reduction of the greenbacks to $300,000,- 
000; for the substitution of silver coin for the fractional 
currency ; and for the resumption of specie payments on 
January 1st, 1879. On that date, specie payments were 
resumed with no difficulty. In May, 1878, Congress pro- 
hibited the further permanent retirement of greenbacks, 
and the am.ount then outstanding ($346,681,000) still re- 
mains. 

Required reading. Taussig, Principles, ch. 23, § 3. 

Suggested reading. Dewey, Financial History of the United 
States, §§ 116-125, 131, 143-147, 155, 156; White, Money and Bank- 
ing, Bk. II., chs. 3, 4, 5. 

3. Silver Legislation. 

a. In 1873, a revision of the coinage laws dropped the 
silver dollar from the list of coins, since there had been 
no demand for it for many years. A decline in the value 
of silver immediately afterward made this change unex- 
pectedly significant and led to a demand for free coinage 
of silver. 

b. The compromise act of 1878 (Bland act) provided 
that the government should buy each month not less than 
two nor more than four million dollars worth of silver 
bullion at the market price and coin it into dollars con- 



86i American Monetary History 

taining 371.25 grs. of pure silver; that these dollars 
should be legal tender ; and that certificates of deposit 
might be issued upon the deposit of such coin with the 
government, such certificates being receivable for pub- 
lic dues, but not legal tender. 

c. The predicted transition to a cheap silver standard 
did not take place as the silver issues were limited in 
amount and met the country's need for more money. The 
agitation for free silver continued and in 1890 another 
compromise act was passed. 

d. This Sherman Law of 1890 provided that the gov- 
ernment should issue legal tender notes to be used in buy- 
ing 4,500,000 ozs. of silver monthly at the market price. 
Only so much silver was to be coined as was needed for 
the redemption of these Sherman notes. Further, they 
might be redeemed in gold or silver at the discretion of 
the Treasury, it being declared the policy of the United 
States to keep the two on an equality. The purchase pro- 
visions of the law of 1878 were repealed, but silver certifi- 
cates were still to be issued. 

e. The larger amount of Treasury notes issued under 
ths act and added to the existing legal tenders made a 
greater demand on the gold reserve. Unfavorable trade 
conditions, large expenditures and decreased revenues en- 
dangered the maintenance of the gold standard. There 
resulted an acute panic in 1893. In consequence the pur- 
chase provisions of the act of 1890 were repealed (1893). 

Required reading. Taussig, Principles, ch. 21, § 4; Seligman, 
Principles, § 194. 

Suggested reading. Dewey, Financial History of the United 
States, §§ 170-173, 186-189; Taussig, Silver Situation in the 
United States, Part I. ; White, Money and Banking, Bk. II., ch. 6. 

4. The Great Silver Controversy. 

o. The panic of 1893 and the resulting depression 
were most serious affecting all classes and especially the 



American Monetary History 87 

farmers of the West because of low prices for produce. 
Discontent revealed itself politically in the rise of the 
Populist Party and the demand for free coinage. This 
policy was advocated by the Democratic Party in the 
election of 1896 with W. J. Bryan as its presidential can- 
didate. The campaign was one of the fiercest in the 
country's history. 

b. The discussion was in part concerned with the 
preferability of bimetallism or gold monometallism from 
the standpoint of the effects upon the stability of the 
standard of value and upon the par of exchange with 
other countries. 

c. But it centered more vitally about the fact of falling 
prices to which the free coinage advocates ascribed dis- 
astrous results and due, in their opinion, to the demone- 
tization of silver. The gold advocates explained low 
prices by changes in methods of production and trans- 
portation ; and emphasized the evils of remonetization 
which would result in a dollar of lower value to creditors, 
laborers and those with fixed incomes. 

d. There was also much argument as to the possibility 
of maintaining a bimetallic standard at 16: 1. The gold 
men contended that bimetallism had always been impos- 
sible and that it would result in a depreciated silver 
standard. The silver advocates believed bimetallism not 
impossible; but they favored free coinage if it did dis- 
place all gold. A third group of international bimetaUists 
believed that the evils of the gold standard were great 
but that free coinage of silver by the United States alone 
would be disastrous; and they, therefore, urged that ef- 
forts be renewed to secure an international agreement es- 
tablishing bimetallism. 

e. The gold standard party won and in 1900 Congress 
passed a law which provided that gold is the standard of 
value and making it the duty of the Secretary of the 



88 American Monetary History 

Treasury to maintain all other moneys at a parity with 
it ; that all United States notes shall be redeemed in gold 
and that a reserve fund of $150,000,000 shall be main- 
tained for this purpose ; that the Treasury notes of 1890 
shall be retired and that silver certificates shall be mainly 
in small denominations. 

Required reading. Taussig, Principles, chs. 20, 21, 22; Selig- 
man. Principles, § 195; Holdsworth, Money and Banking, chs. 
3 and 5. 

Suggested reading. Hepburn, Contest for Sound Money, ch. 
18; Johnson, Money and Currency, chs. 11, 12; Hadley, Econom- 
ics, pp. 208-231 ; Taussig, Silver Situation in the United States, 
Part II. ; Walker, International Bimetallism. 



CHAPTER XL 

AMERICAN BANKING HISTORY. 

1. State Banking Before the Civil War. 
Before the Civil War a large part of the monetary 
circulation consisted of bank notes issued by banks char- 
tered under state laws. They revealed many serious 
evils, being issued in excessive amounts, unprotected by 
sufficient reserves or paid up capital, redeemable with 
difficulty and easily counterfeited. They caused much 
loss and injustice. The Suffolk hank system worked 
great improvement in New England. In New York state 
the safety fund and special pledge systems gave some 
valuable experience. 

Required reading. Seligman, Principles, § 206; Holdsworth, 
Money and Banking, ch. 9. 

Suggested reading. White, Money and Banking, Bk. III., chs. 
9-12. 

2. The United States' National Bank System. 

a. In order to make a better market for United States 
bonds during the Civil War Congress established the Na- 
tional Bank System and later by a prohibitive tax on 
other bank notes gave it a monopoly of bank note circu- 
lation. Rigid control of the banks was given the Comp- 
troller of the Currency. 

b. Minimum percentages of reserves were prescribed, 
the banks being divided into three classes according to 
the business importance of the cities in which located. 
Banks, except those of the highest class, were allowed to 
keep part of their reserves deposited in banks of a higher 
class. 

c. Bank notes can be issued only when fully protected 
by deposit of United States bonds and a redemption fund 



90 American Banking History 

with the Comptroller. Such notes are not a legal tender 
between individuals but are payable between banks and 
for most purposes to and from the government. 

d. While the national bank note circulation has been 
absolutely safe, it has lacked elasticity both as to total 
amount and as to sectional requirements. Further the 
reserve requirements became a source of weakness in 
time of panic because of the "pyramiding of reserves" 
and the individual self-regarding action of the banks. 
The system was lacking in unity, centralization and adap- 
tation to the commerce and manufacturing of the present 
age. After much discussion the Federal Reserve Act, de- 
signed to correct these defects, was passed in 1913. 

Required reading. Taussig, Principles, ch. 27, § 2, ch. 28; 
Seligman, Principles, §206; Seager, Principles, §§ 197-200; 
Holdsworth, Money and Banking, ch. 11. 

Suggested reading. Dewey, Financial History of the United 
States, §§ 138, 139, 163-165, 174; White, Money and Banking, Bk. 
III., chs. 14, 19. 

3. Federal Reserve System. 

a. General supervision of the system is given the Fed- 
eral Reserve Board consisting of the Secretary of the 
Treasury, the Comptroller of the Currency and five per- 
sons appointed for long terms by the President. It con- 
trols the business of the Reserve Banks, may suspend 
reserve requirements, may require one Federal Reserve 
Bank to rediscount paper for another ; and may fix the 
rate of discount. 

b. Under this act there have been established twelve 
Federal Reserve Banks scattered throughout the country. 
They are owned each by the banks in its region ; but 
only a limited part of any profits may go to these stock- 
holding banks. Their directors are elected in part by 
these member banks and in part appointed by the Fed- 
eral Reserve Board. While they will do a general bank- 
ing business with the member banks (and almost exclu- 



American Banking History 91 

sively with them), their chief services will be rediscount- 
ing commercial paper for them and holding a portion of 
their reserves. They will also act as fiscal agents for the 
United States and as general clearing houses. 

c. A member bank must keep on deposit (as reserve) 
with the Federal Reserve Bank of its district three per 
cent, of its time deposits ; and thirteen, ten or seven per 
cent, of its demand deposits according as it is in a Cen- 
tral Reserve City, a Reserve City or not in either. Fed- 
eral Reserve Banks must keep a minimum reserve of 35% 
against deposits which requirement may be suspended 
under penalty by the Federal Reserve Board. 

d. The act authorizes Federal Reserve Notes, obliga- 
tions of the United States, issued at the discretion of the 
Federal Reserve Board on application of Federal Re- 
serve Banks. A Reserve Bank receiving them must de- 
posit commercial paper or gold as security for them and 
keep a gold reserve of 40% against them. It may be re- 
quired to pay interest for the use of them. 

e. The act looks forward to a gradual retirement of 
the existing national bank notes by transfer from mem- 
ber banks to the Federal Reserve Banks of the bonds 
held to secure such notes and the circulation privilege 
attaching thereto. 

/. This system endeavors to widen the use of the ac- 
ceptance as an instrument for financing business. It al- 
lows the establishment of branch banks in foreign coun- 
tries and is designed to develop and finance foreign com- 
merce. 

g. By reason of the concentration and mobilization of 
reserves, the process of rediscounting, the new note is- 
sues, and the authority to suspend reserve requirements, 
it is hoped such aid may be given banks and the business 
community in time of monetary stringency and alarm 
about credit solvency, as to prevent such panics as are 



92 American Banking History 

due to the defects in the credit system. Those crises due 
to essentially unsound business and investment are evi- 
dently beyond remedy. 

Required reading. Seligman, Principles, § 208; Taussig, Prin- 
ciples, ch. 27; or Holdsworth, Money and Banking, chs. 21, 22. 

Suggested reading. White, Money and Banking, ch. 22. 



CHAPTER XII. 

INTERNATIONAL EXCHANGE. 

a. Most international payments are settled by the use 
of credit instruments, essentially in the same manner in 
which domestic payments are made. Such bills when 
drawn upon important financial centers, and pre-eminent- 
ly when drawn upon London, may by endorsement pass 
from country to country forming an international cur- 
rency. 

b. Bills of exchange are commercial or documentary 
if drawn against exports of merchandise; financial or 
bankers' if drawn by bankers. They are "sight" if pay- 
able on presentation; and "time," if payable a certain 
length of time after date. The time bill will be lower in 
price than the sight bill by the interest for the ensuing 
period. 

c. The "par of exchange" between two countries is 
the expression of the value of the standard unit coin of 
one country in terms of the standard unit coin of the 
other. Since the Enghsh sovereign contains 4.866-(- as 
much gold as a gold dollar, the par of exchange between 
England and the United States is one pound sterlings 
$4,866+. Exchange between two countries is said to be 
at par when the amount of specie given for a bill of ex- 
change in one country is exactly equal to what will be 
received for it in the other. 

d. Since trade conditions are constantly changing, ex- 
change is rarely at par. If a country's obhgations are 
greater than its claims, the demand for bills of exchange 
(at par) will be greater than the supply and they will sell 
at that premium which will cause an equihbrium. If its 



94 International Exchange 

obligations are less than its claims, then correspondingly 
bills of exchange will be at a discount. 

e. The limits of these fluctuations are found in the 
cost of importing or exporting specie. The premium on 
bills of exchange can not ordinarily go above the cost of 
exporting specie nor the discount below the cost of im- 
porting it. These limits are called the "gold points." In 
time of great monetary stringency such normal limits 
may be passed. 

/. A country's balance of credit or debit (upon which 
the price of foreign exchange depends) can not be ascer- 
tained by examining solely exports and imports of com- 
modities. There must also be taken into account securi- 
ties bought and sold, expenses of travellers, ocean 
freights, interest on obligations of one country held in 
others, commissions and any other items affecting bal- 
ance of liability. 

g. Business is done largely upon credit ; credit de- 
pends largely upon specie reserve ; specie reserve is af- 
fected by gold imports or exports ; such movements of 
specie depend upon the price of foreign exchange. The 
rate of foreign exchange, then, has great significance to 
merchants, manufacturers, bankers and speculators. 

Required reading. Taussig, Principles, chs. 32, oi ; Seligman, 
Principles, §§ 211, 212; Seager, Principles, §§ 201-205; Chicago 
Materials, pp. 549-559, 566-577. 

Suggested reading. Holds worth, Money and Banking, ch. 15. 



CHAPTER XIII. 
PROTECTION AND FREE TRADE. 

1. Definition and Discrimination. 
a. Protection means "the policy of encouraging and 
developing home industries by means either of bounties 
paid to home- producers or of duties imposed upon goods 
imported from abroad." 

h. Free trade means trade carried on in such a way 
that no protection is afforded the home producer. Duties 
on commodities not produced in the country are consistent 
with free trade. So are duties upon foreign commodities 
which are also produced in the country, if they are ac- 
companied by equivalent excises. 

c. A tariff levied mainly for revenue may give inci- 
dental protection. A protective tariff may produce great 
revenue. 

d. An increase of the rate of the protective duty may 
lower revenue by greatly decreasing importations. 

e. The taxation of foreign goods which can not be 
produced at home encourages home industries theoreti- 
cally, since to some extent it results in substitution in 
consumption of similar home-produced articles. 

2. History of Governmental Relations to Foreign Trade. 

a. Under Mercantilism (15th, 16th and 17th centur- 
ies) governments restricted and aided trade by many 
methods and in nearly all lines. Import and export du- 
ties, bounties, navigation laws, prohibition were all used 
to develop a nation's trade and manufactures. This was 
largely, however, under the influence of the balance of 
trade theory. 



96 Protection and Free Trade 

h. The general movement for freedom in the eigh- 
teenth century included a demand for greater freedom of 
international trade. Adam Smith vigorously attacked 
the Mercantilist system, set forth the advantages of free 
trade and became the recognized spokesman of this policy. 
His influence was far-reaching, not only upon economists, 
but also upon statesmen. 

c. Although William Pitt, the younger, revealed the 
influence of Adam Smith, the first actual progress in Eng- 
land toward free trade was accomplished by Huskisson 
between 1823 and 1828. In 1837 the famous anti-corn 
law agitation began, and, under the leadership of Richard 
Cobden and John Bright, continued until the repeal of the 
Corn laws in 1846. The free trade pohcy was gradually 
extended until in 1869 the present absolutely non-protec- 
tive system was introduced. 

d. The tariff policy of the United States. 

(1) The first national revenue system included a tariff 
law which, mainly designed to secure revenue, was 
moderately protective. Such was our national policy 
for some years. From 1807 to 1815 the Embargo, 
the Non-intercourse Act and war cut off foreign 
commerce, turned the demand for certain products 
toward the home producer and acted as extreme pro- 
tection. When these conditions passed away the pro- 
tected home producer, suddenly exposed to the full 
force of foreign competition, secured in 1816 the 
first distinctly protective tariff. 

(2) Laws passed in 1832 and 1833 provided for reduc- 
tion and then a gradual decrease of duties. Although 
increased duties were imposed in 1842, the act of 1846 
again provided for low rates. So satisfactory were 
the results of low tariff that in 1857 a further reduc- 
tion was made. 



Protection and Free Trade 97 

(3) For revenue reasons high duties were imposed 
during the Civil War. Incidentally, these duties in- 
volved heavy protection. Industries that thus came 
to be dependent on protection were unwilling to dis- 
pense with it, when after the War the urgent need of 
revenues therefrom had passed away. The political 
weakness of the South (where low tariff views had 
prevailed) and the growing political strength of the 
industrial regions favored a continuation of the high 
war tariff. 

(4) President Cleveland's famous tariff message in 
1887 made the tariff again a live poHtical issue, but a 
RepubHcan victory in the elections contested over 
this question, led to the passage of the very highly 
protective McKinley act in 1890. 

(5) The popular discontent with this act soon placed 
the Democrats in full control, and in 1894 the Wil- 
son-Gorman act was passed and became law with- 
out the President's signature. This measure (a com- 
promise and badly devised) was highly protective 
and did not fairly represent the policy of tariff- 
reduction. 

(6) In 1897 the Dingley act introduced the most high- 
ly protective system the country had known. Be- 
cause of popular feeling and because of promises 
made to revise the tariff downward, an act was passed 
in 1909. Except for placing hides on the free list, 
this law gave no indication of a relaxation in the high 
protective system. 

(7) In the election of 1912 the tariff consequently 
again became a leading issue. The Democratic party 
having elected the President and a majority of each 
house, proceeded, in special session, to a general re- 
vision. The resulting bill provided for general re- 
ductions in rates and important additions to the free 



98 Protection and Free Trade 

list. It is the first real movement toward lower 
tariff since the beginning of the Civil War and marks 
the end of an epoch. 
e. The general expectation in the middle of the nine- 
teenth century that the contemporary tendency toward 
free trade would continue, was mistaken. France, Ger- 
many, Italy, and, in fact, practically all countries main- 
tain high-protection. 

Required reading. Chicago Materials, pp. 578-590; Seligman, 
Principles, § 213. 

Suggested reading. Dewey, Financial History of the United 
States, §§ 35, 2,6, 72>, 78-84, 102, 107, 113, 114, 119, 127, 128, 167, 180, 
181, 187, 192, 196 1 Palgrave, Dictionary of Political Economy, 
vol. II., p. 148, article Free Trade, Modern History of, 

3. Some General Controversial Considerations. 

a. There is much fallacious argument on both sides 
based on alleged results. Post ergo propter. Countries 
have prospered under each system. The United States 
was very flourishing under low tariff from 1846 to 1861, 
and under high tariff from 1897 to 1907. Panics oc- 
curred under low tariff in 1847 and 1857, and under high 
tariff in 1873, 1884-6, and 1907. 

h. Many forces affect a country's prosperity — natural 
resources, human efficiency, education, wars, forms of 
social organization. It is, then, difficult to trace the exact 
influence of free trade or protection. The results of each 
are undoubtedly often much exaggerated. ■ 

c. The free trader in asserting, as he sometimes does, 
that the government can not tax one for the benefit of 
another, misrepresents the protectionist attitude, for pro- 
tection claims that it benefits all. The free trader, fre- 
quently, also demands a more extreme application of 
laissca faire than is in harmony with modern thought and 
practice as to the relation of government to industry. 

d. On the other hand, the actual establishment of a 
new industry by protection does not necessarily justify it. 



Protection and Free Trade 99 

Almost any industry might be established in almost any 
country by protection ; but it might be at too great cost. 

e. We can not settle this controversy by regarding 
the consumer alone as does the free trader often ; nor by 
regarding the effect on a few producers as does the pro- 
tectionist. 
For references see end of the chapter. 

4. The Argument for Protection, 

a. The "balance of trade" argument emphasizes the 
desirability of securing a large share of the precious 
metals by discouraging imports and encouraging exports 
of commodities. A favorable balance of trade will result 
in an import of money, and thus a nation will get wealthy. 
Intelligent protectionists no longer use this argument. 

h. For a long period the "home market" argument 
was influential in the United States. It was "thought to 
reconcile the interests of the agricultural South and West 
with those of the manufacturing North. It rests upon 
the proposition that the prosperity of the American farm- 
er depends upon a regular and constant market for his 
products, and that such a market is to be obtained only 
by building up manufacturing centers within the coun- 
try." (Seager). 

c. The "infant industry" argument asserts that a 
country well fitted in natural resources and in the char- 
acter of its people to carry on a certain industry, may not 
be able to estabHsh it without protection because of the 
competition of other nations in which the industry has 
long been carried on. A temporary burden upon the con- 
sumer is justified because of the latter results. Competi- 
tion within the country will eventually reduce prices. 

Friedrich List, a German Economist (19th century), 
asserted that the industrial development of a country in- 
cludes five stages ; hunting and fishing, pastoral Hfe, 
agriculture, manufacture for home supply, manufacture 



100 Protection and Free Trade 

for export. In the case of some nations this evolution is 
checked in the transit from the agricultural stage by com- 
petition of nations that have progressed further. Hence, 
said List, temporary protection is necessary to enable a 
country to pass from the agricultural to the manufactur- 
ing stage. 

d. The "wages argument" for protection has taken 
two phases in the United States. Early in our history, 
protection was said to be necessary to overcome the dis- 
advantage of the American manufacturer due to the high 
wages he must pay. Later it was asserted that wages had 
become high because of protection. Now the two are ad- 
vanced together ; wages are high because of protection 
and we must continue protection in order to overcome the 
industrial disadvantage of high cost due to high wages. 

e. The advantages of "diversified industries" have re- 
cently been emphasized. A well-rounded economic de- 
velopment with different kinds of occupations is necessary 
to social progress. Without protection a country may be 
one-sided in its development with an undue tendency 
toward agriculture or manufacturing, resulting possibly 
in early exhaustion of some kinds of natural resources. 
Diversified industries, says the protectionist, securing "a 
more efficient utilization of labor and capital and a help 
to enterprise, will result in higher wages as well as 
greater profits, a better standard of life for the workmen 
and a more prosperous condition for the manufacturer." 

/. It is sometimes said that by protection a country 
may make foreigners pay its taxes. The imposition of 
the protective duty will compel the foreign manufacturer 
to reduce his price in order to retain his market in the 
taxing country. With slight or even no increase in price 
to the domestic consumer, the government gets its rev- 
enues at the expense of the foreigner. 



Protection and Free Trade 101 

g. In order to be independent of other nations in time 
of war a country should estabHsh by protection those in- 
dustries producing necessities of existence and war ma- 
terials. 

For references see end of the chapter. 

5. The Argument for Free Trade. 

a. Against the "balance of trade" argument it is said 
that wealth does not consist of money only ; that an ex- 
cessive stock of money, if it could be secured in this way, 
would so affect prices as to stimulate imports and dis- 
courage exports ; that imports must in the long run pay 
for exports ; and that international movements of money 
depend not upon relation of exports of commodities to 
imports of commodities, but of total credits to total lia- 
bilities. 

b. Against the "home market" argument it is claimed 
that the home market is no steadier than the foreign ; 
that the development of transportation has decreased the 
cost of moving goods ; and that the need of the United 
States at present is foreign markets. 

c. The "infant industry" argument is held to have lit- 
tle weight now, since we are able to compete with the 
world in nearly every line of manufacture and have passed 
from an agricultural economy. Further, it is said, that 
"infant industries" never are willing to dispense with that 
aid which was designed to be temporary ; that while ad- 
mittedly protection should be granted only to those in- 
dustries which are quite sure to succeed ultimately, this 
aid is applied generally and without discrimination ; and 
that the protection of agricultural industries is not con- 
sistent with this theory. Moreover, as evidence that in- 
dustries can and do develop without protection, emphasis 
is placed on the development of manufactures in the 
newer parts of the United States, in spite of the compe- 
tition of the older manufacturing regions within the 
country. 



102 Protection and Free Trade 

d. The free trader asserts that wages are fixed by pro- 
duction and little dependent upon the tariff. He calls at- 
tention to the fact that wages in the United States, be- 
cause of the high level of productivity, have always been 
high in unprotected as well as in protected industries and 
that protected laborers are few as compared with the un- 
protected. High wages do not necessarily mean high 
cost, but frequently low cost. Comparative costs rather 
than comparative wages determine ability of manufact- 
urers to compete with those of other nations. While the 
withdrawal of protection might destroy certain indus- 
tries, the level of general wages would not fall after re- 
adjustment had taken place. Wages are low in Russia 
and Germany, although these countries are strongly pro- 
tectionist. Further the free trader asserts that protec- 
tion, by interfering with the most natural and efficient 
production, actually tends to make wages lower than they 
would otherwise be. 

e. The free trader, while not denying that diversifica- 
tion of industries is desirable, contends that it may be se- 
cured at too great cost ; that much diversification is inevi- 
table in every country ; that in the United States we can 
not fail to have great diversification because of the variety 
of climate and resources ; and that infinite wisdom and 
foresight are necessary to secure a proper diversification 
artificially. Natural development is safer. 

/. To make the foreigner pay our taxes is unethical ; 
and is possible only in a few cases. Moreover the for- 
eigner can, if this argument be sound, make us pay his 
taxes. 

g. The military argument may have some weight for 
other countries, but httle for the United States, because 
we produce nearly all necessaries. 

h. More positively, the free trader asserts that free- 
dom of international trade, like freedom of internal trade, 



Protection and Free Trade 103 

increases production of wealth by bringing about the 
"most efficient utiHzation of economic forces." "The 
freer the conditions of exchange the more highly will 
the division of labor be developed. Difference in the pro- 
ductive capacities of different countries fit some to pro- 
duce some things, others, others. If free trade is per- 
mitted . . . the consequence will be a larger joint 
produce and a larger share of wealth for each country." 
(Seager). 

i. Protection, if effective, increases prices, burdens the 
consumer and is class legislation. 

y. By increasing the cost of raw material protection 
injures many manufacturing industries. This argument 
has been advanced vigorously in some parts of the United 
States recently. Our export trade is injured by taxing 
raw materials. 

k. Protection leads to the exhaustion of raw materials. 

/. Protection involves business uncertainty. 

m. Protection leads to political corruption, undue in- 
fluence from protected interests on political parties and 
legislation, and log-rolling. Campaign funds are sup- 
plied by protected parties. 

n. While theoretically there is much to be said for 
protection (especially in connection with nascent indus- 
tries) if designed by a judicious, disinterested and ex- 
ceedingly wise authority, actual conditions and practical 
experience condemn it. 

For references see end of the chapter. 

6. Conclusion. 

a. With much strength and much weakness in the ar- 
gument on each side it is not strange that both popular 
and expert opinion should be divided. Each must form 
his own conclusions. 



104 Protection and Free Trade 

h. However, the one who accepts the conclusions of 
the free trader must remember that, in the United States, 
our whole industrial and commercial system is adjusted 
to protection. Progress toward free trade, if it be de- 
sirable, must be gradual, discriminating and mindful of 
actual conditions. 

c. On the other hand the protectionist should remem- 
ber that there is little argumentative support for con- 
tinuous and universal protection. Hence no particular 
tariff is permanent and sacred. Changing conditions re- 
quire frequent revision. 

Required reading, a and either h or c. 

a. Bullock, Selected Readings in Economics, pp. 472-512; or 

Chicago Materials, pp. 590-608. 

b. Taussig, Principles, chs. 34, 35, 36, Z7. 

c. Seager, Principles, §§ 214-220; Seligman, Principles, §§ 

214-216. 

Suggested reading. Article on Protection in International En- 
cyclopedia; Smart, The Return to Protection, chs. 1-12. 



CHAPTER XV. 

COMBINATION ; MONOPOLIES. 

1. Definition and Classification. 

a. "Monopoly means . . . such control over the 
supply of an economic good as enables the monopolist to 
regulate its price." (Seager). Monopoly should be dis- 
criminated from scarcity, from differential advantage, 
from large business enterprise. 

b. Monopolies may be classified as 

(1) Personal monopolies due to unusual personal tal- 
ent or knowledge. 

(2) Legal monopolies created by law which may be 
private if granted to private persons ; public if re- 
served as a governmental privilege. 

(3) Natural monopolies where certain conditions seem 
quite inevitably to produce monopoly. Such may be 
monopolies of location due to the Hmited supply of 
some natural agent or opportunity, as in the case of 
mineral springs, the anthracite coal supply of the 
United States, street railways in certain streets, rail- 
roads in mountain passes ; monopolies of organisa- 
tion in industries of increasing returns, as gas, water, 
electric lighting companies ; railroads, in which fix- 
ed capital and supplementary costs are influential ; 
capitalistic monopolies or "trusts" due to the advan- 
tage of controlling a larger capital than that of other 
producers in the same industry. 

(4) One business may represent several classes of 
monopoly. 

Required reading. Taussig, Principles, ch. 45; Seager, Prin- 
ciples, §§ 118, 119, 221. 
Suggested reading. Ely, Monopolies and Trusts, chs. 1, 2. 



106 Combination ; Monopolies 

2. Personal and Legal Monopolies. 

a. Personal monopolies are relatively insignificant; 
mainly in lines of service that are not absolutely neces- 
sary ; are subject to the competition of somewhat lower 
grades of ability ; and consequently need no special regu- 
lation or consideration. 

h. Private monopolies of the older sort are no longer 
granted. Patents and copyrights are granted in order, 
first, to secure compensation to inventors and writers for 
their intellectual labor; and, secondly, to encourage the 
investment of capital in making the invention or book 
available to the public. While in individual cases social 
injury rather than benefit results, and while not only are 
particular patent and copyright laws open to serious criti- 
cism but even the fundamental ideas of such systems are 
somewhat criticized, still they are generally accepted as 
the most practicable methods of rewarding these classes 
of producers. 

c. Public legal monopolies are of great importance, 
but for sociological or fiscal rather than purely economic 
reasons. 

Required reading. Seager, Principles, §§ 223-225. 

Suggested reading. Palgrave, Dictionary of Political Econ- 
omy, article on Patents ; Le Rossignol, Monopolies, ch. 5. 

4. General Consideration Regarding Natural Monopolies. 

a. The tendency toward the formation of combina- 
tions, possessed of more or less monopolistic powers, is 
natural and inevitable. 

b. Monopoly value tends to be fixed at that point 
which gives greatest net returns (Chapter V., § 7). 
Hence there will tend to result frequently, prices high as 
compared to normal values ; bad quality quite beyond the 
consumer's power to redress ; a resulting interference 
with normal and just distribution ; the accumulation of 
great fortunes which are out of proportion to the ser- 



Combination ; Monopolies 107 

vices rendered society ; social injury because of the dis- 
couragement to the consumption of certain monopolized 
articles of great utility. 

c. The power of a monopoly to control prices is, how- 
ever, subject to certain restrictions without conscious so- 
cial effort. The consumer may refrain from consuming 
the article in some cases with no great injury to himself 
and even with a positive economic gain ; or he may sub- 
stitute some other article for the monopolized one. Fur- 
ther if a monopoly pushes its advantage too far, competi- 
tion may arise. 

d. These possibihties of injury and of natural remedy 
vary in different lines of consumption. In the case of 
necessaries, especially if a natural Hmited supply is con- 
trolled, the consumer is at the mercy of the monopoly ; 
while in the case of luxuries no serious results are likely. 
But even if a monopoly does not use its power to the ut- 
most, these evils may be present in greater or less degree. 
To take a dime unfairly where a dollar might have been 
extorted involves a relatively small injury, but social in- 
justice and danger are present. 

e. Moreover the nominal returns to the owners of a 
monopoly are not a sure indication of the profits really 
made by prices above normal value. High salaries, large 
profits made by subsidiary companies, overcapitalization 
may conceal the fact of undue gains. 

/. For these reasons many hues of pubhc policy have 
been suggested to prevent the actual or possible evils. 
These may be grouped under the heads of re-establish- 
ment of Competition ; Pubhc Ownership ; Pubhc Regu- 
lation. 

Required reading. Review Taussig, Principles, ch. IS ; Seager, 
Principles, §§ 120, 123, 124; Seligman, Principles, §§ 148, 156. 

Suggested reading. Palgrave, Dictionary of Political Econ- 
omy, article on Monopolies ; Jenks, The Trust Problem, chs. 2, 
10; Ely, Monopolies and Trusts, pp. 217-240. 



108 Combination ; Monopolies 

5. Re-establishment of Competition. 

The numerous recent attempts to re-establish competi- 
tion by prohibiting combination or concerted action have 
been almost without exception failures. Even if the nom- 
inal object of the law is attained, combination is contin- 
ued in some other method. "Where combination is pos- 
sible, competition is impossible." In many cases monop- 
oly is desirable as a matter of public interest. Competing 
waterworks, gas companies, telephone companies, rail- 
roads, mean public inconvenience, a waste of capital, and 
in the long run higher cost to the consumer. As Profes- 
sor Ely says, "We must have monopolies in these cases 
and the only question we are concerned with is, 'What 
kind of monopolies shall we have? ' " 

Suggested reading. Jenks, The Trust Problem, pp. 217-221 ; 
212, 213. 

6. Public Ownership. 

The immediate answer of many to the question in the 
last section is Public Monopolies. Better service ; lower 
prices or larger public revenues ; prevention of great pri- 
vate fortunes ; destruction of the corrupt poHtical control 
gained by corporations ; end of discriminations that 
means the success or failure of private business ; relief 
of the producer or shipper of raw materials from disas- 
trous oppression, are some of the alleged benefits that 
would flow from public ownership. In actual experience 
varying results show themselves, so that while these bene- 
fits may be realized and in some cases actually have been, 
there is sufficient conflicting evidence to make public 
ownership at least questionable. Service under Public 
Ownership is declared inferior ; lower prices, if given, 
may be at the expense of the tax payer and not because of 
efficient management ; these public undertakings become 
political spoils and corruption develops. The importance 
of the service ; the size of the force of workers employed ; 
the nature of the technical problems to be dealt with ; 



Combination ; Monopolies 109 

the amount of capital involved ; the civic development 
and general character of the community concerned ; the 
administrative capacity of the government are factors in- 
fluencing the decision. The water supply tends fortunate- 
ly toward public ownership ; but, in the opinion of most 
impartial students of the question, public ownership of 
the railways would be disastrous in the United States even 
though it is successful in other countries ; and public 
ownership of the great capitalistic monopolies is advo- 
cated only by the socialists. Between these extremes are 
gas and electric lighting, telephones, the telegraph, ex- 
press and municipal transit. 
Required reading. Either a or b. 

a. Taussig, Principles, ch. 62, §§ 1-7. 

b. Seager, Principles, §§ 228-233, 242, 243; Seligman, Prin- 

ciples, §§ 232-234. 

7. Public Regulation. 

Since the evils of uncontrolled monopoly are certain, 
since competition can not be forcibly restored, and since 
public ownership has not been approved in the United 
States and in some other countries, private ownership has 
been subject to public regulation. This solution of the 
monopoly question which is the actual American method 
and now in process of rapid development, takes innum- 
erable forms of which only a few can be mentioned. The 
quality of the service or commodity may be prescribed ; 
the price fixed ; discrimination between different con- 
sumers forbidden ; the length of the franchise limited ; 
the capitalization regulated ; taxes imposed upon earn- 
ings to secure some of the monopoly profits for the com- 
munity. Some form or other of public service commis- 
sion is the instrument by which the community exercises 
this regulation. Essential to success is the power to in- 
vestigate and to enforce publicity. 

Required reading. Either a or b. 

a. Taussig, Principles, ch. 62, § 8, ch. 63. 

b. Seager, Principles, § 233, chs. 24, 25 ; Seligman, § 235. 



110 Combination; Monopolies 

8. Conclusion. 
The growing extent of monopolies, the resulting seri- 
ousness of the problem, the differences in the conditions 
affecting the different sorts of monopolies, the complexity 
of the political, legal, sociological, fiscal, technical and 
economic factors involved, make this subject too difficult 
to be more than outlined in a general course. Only after 
careful special study of this subject can one rightly form 
a judgment. 



